PwC As per recently released indicators, India's real GDP grew by 6.9 per cent in 2004-05. Alongside non food credit grew by 26.5 per cent, which is the second highest growth in the last 55 years.
The Reserve Bank of India (RBI) desires to maintain this growth rate and has formulated its policy in the context of a projected 7 per cent GDP growth in 2005-06.
On the inflation front, the same was 5 per cent at end March, 2005 and has been considered by RBI to hover in the range of 5-5.5 per cent in 2005-06 with a caution about the growing uncertainty on account of the possible impact of global oil prices.
Another risk to growth identified by RBI is the fiscal imbalance and leveraging in certain global advanced economies.
Against this backdrop a key thrust of RBI's policy this year has been to provide adequate liquidity for maintaining the domestic growth momentum, while trying to ensure price stability and contain inflationary expectations.
Accordingly, while the bank rate (generally used to price medium and long term loans) has been kept unchanged at 6 per cent, the reverse repo rate has been increased by 25 basis points to 5 per cent.
The cash reserve ratio has been kept unchanged at 5.0 per cent. The reverse repo hike is the RBI's second successive rate hike after a 25 basis point hike from a four-decade low of 4.5 per cent last October.
Though this rise may not lead to an immediate increase in interest rates, it does send out a signal on the general direction thereof.
On the policy and structural front, there was a general expectation of introduction of interest rate futures which could have provided the markets with a hedging mechanism and possibly increased trading in the bond market. However, no announcements to this effect have been made by the RBI.
Nevertheless, it has provided a clear thrust on increasing credit flow to sectors such as agriculture, small scale and medium enterprises and to the rural underprivileged (through micro finance initiatives).
As part of these initiatives, the RBI has announced that it is exploring ways for strengthening of regional rural banks.
Further, the RBI has also given direction on certain prudential measures including mergers of banks and NBFCs, supervision of financial conglomerates, protecting consumer interests and adopting standardised approach (based on ratings by recognised rating agencies) for credit risk for determining capital adequacy while simultaneously developing skills for an internal rating mechanism.
