The reversal begins

COMMENT: Keki Mistry, V-C & MD, HDFC

As was widely expected, the second-quarter review of the monetary policy for 2009-2010 came with no surprises, as the Reserve Bank of India (RBI) chose to continue its accommodative monetary policy, with no changes in key policy rates.

The prime minister, officials from the finance ministry and the Economic Advisory Council had earlier stressed the need for a similar stance. This harmonised viewpoint led to a growing consensus that interest rates might hold steady till at least the end of the calendar year.

Restoring the statutory liquidity ratio (SLR) to 25 per cent and subjecting CBLO (collateralised borrowing and lending obligation) liabilities of banks to maintenance of the cash-reserve ratio is a calibrated approach of gradually withdrawing some excess liquidity from the system. These measures, however, may have a minimal impact. Banks’ SLR investments are currently at 27 per cent of their NDTL (net demand and time liabilities).

Further, banks on an average have been parking over Rs. 1,25,000 crore under the reverse repo window and investing over Rs. 1,00,000 crore in mutual funds. Nonetheless, RBI has taken the first step in commencing a gradual reversal of its expansionary monetary stance. Given that some of the special refinance facilities were not being used, withdrawing these is a salutary measure.

RBI’s dilemma ranges from anchoring inflationary expectations without compromising on growth, containing asset bubbles and managing currency volatility and the government’s borrowing programme. There are signs of a steadily improving economy. The 10 per cent industrial growth for August is encouraging.

While corporate performance has improved on the back of lower input costs, top-line growth continues to remain muted. Investor sentiment has turned positive, reviving the capital markets. There are also concerns about real estate prices rising again. This justifies the increasing provisioning requirements for commercial real estate exposures.

Another prudent measure is stipulating a provision coverage ratio of not less than 70 per cent of non-performing loans. RBI has rightly been cautious on securitised assets by mandating a minimum one-year seasoning of loans before they can be sold.