A prudent policy

MONETARY POLICY 2006-07

The RBI's Annual Policy Statement for 2006-07 is a reflection of the fact that our Central Bank has been using the monetary tools with optimal flexibility and prudence.

As the headline inflation is controlled below 4.0 per cent at the end of the last fiscal year, the RBI has not touched the key Policy Rates like Bank Rate or Repo and Reverse Repo Rates.

This would certainly keep under check an upward movement in both short-term as well as long-term interest rates and protect the continuity of rising investment demand.

However, at the same time, by raising the caps on NRE deposit rates or export credit rates and raising the risk weight on real estate loans, the RBI has systematically influenced the interest rates in specific segments, where an increase was warranted.

By not reducing the CRR, the RBI has again stressed that there is adequate liquidity in the system. The Policy has appropriately focused on credit quality that is a precondition for maintaining financial stability.

This is achieved by increasing provisioning for standard advances to 1.0 per cent (from 0.4 per cent) for personal loans, capital market exposures, residential housing beyond Rs 20 lakh and commercial real estate loans.

Furthermore, risk weight on exposures to commercial real estate has been increased from the present 125 per cent to 150 per cent. Similarly, exposure to venture capital funds will now be treated as part of capital market exposure and will now attract higher risk weight of 150 per cent. However, it would be fairer if the provisioning on "real estate" is portfolio-based rather than across the board.

There is an attempt in the Policy to deepen the bond/money markets by extending the NDS-OM participation to mutual, pension funds; by introducing screen-based negotiated quote driven system for call and term-money markets and by permitting PDs to diversify their activities.

The measures to consolidate the RRBs will go a long way in strengthening the credit flows in rural areas. The Policy appropriately sensitises the market players of potential risks emanating from global current account imbalances and rising crude oil prices.

A K Khandelwal, Chairman, Bank of Baroda