Ajay Mahajan : Answers To Short-Term Concerns

Ajay Mahajan

MD, Bank of America

The mid-term credit policy statement is along the lines of market expectations, particularly with respect to the monetary policy action. All the three key benchmark rates -- bank rate, repo rate and CRR have been slashed by 25 basis points each.

More importantly, while the interest rate bias continues to be "soft", the governor has ruled out any further cut in bank rate until March 2003.

The outlook on GDP growth has been revised. This certainly seems more realistic keeping the pressures on agriculture and industrial performance this year. The banks have been encouraged to reduce their lending rates, though given the extent of structural problems affecting their balance sheets, large reductions from here look unlikely.

 

In my view, the global economic backdrop is still very weak and any aggressive rate cuts in the US environment will widen the differential between Indian and US rates, and may force a rethink on Indian benchmark rates at some stage.

For the moment, the broad expectation of the market has been met owing to which the fixed income markets will see reasonably strong activity for some time. There is room for both the short and medium end of the yield curve to trade lower, so I am reasonably bullish about the debt markets.

The policy disappoints in not addressing the savings rate. This is the last administered rate in the banking system and needs to be freed. While freeing the savings rate in one go may not be desirable for some market participants, it could certainly be ushered in slowly with a reduction in the savings rate by 50 basis points in this policy.

Also, it was widely expected that the policy would allow USD/INR currency option products available to authorised dealers to offer to their clients. This would have encouraged more effective hedging of those exposures that are better managed through options than forward contracts.

Though there is no specific mention of this product in the policy, the policy does refer to the setting up of a working group in derivatives that will deliberate a number of new products for introduction in the local markets. Hopefully, this group will come out with its recommendations soon.

That said, we must appreciate that the governor has repeatedly stressed that the October statement would be a mid-term review of the April policy. As such, major structural changes were not expected, and not announced. Many of RBI initiatives are stuck at a legislative level. We hope that these are addressed soon, and in time for the April 2003 statement.