Assurance of stable conditions

ANNUAL POLICY 2005-06/ GUEST WRITERS

K Cherian Varghese
CMD
Union Bank of India

The overall stance of annual policy statement announced by the governor of the Reserve Bank of India (RBI) is to provide appropriate liquidity to meet credit growth and support investment and export demand in the economy while placing equal emphasis on price stability.

The Indian economy has presented a better than anticipated performance during 2004-05 with a GDP performance of 6.9 per cent.

The RBI's report on macroeconomic and monetary developments speaks of considerable optimism about medium term macroeconomic prospects.

It says that the structural acceleration of growth is based on solid foundation including weather proofing of the economy. It is expected that India will remain among the fastest-growing economies of the world in the medium term.

The report sounds a very buoyant and positive note by pointing out the resurgence of the industrial sector, accelerated growth in exports and brightening of the domestic investment climate in an environment of rising business optimism and consumer confidence.

Unlike in the past, the mood is very upbeat and one should expect that the country which is home for one-sixth of the world's population should be propelled by a growth engine which will see India emerging as a major economic power.

Appropriately, the policy statement has tried to nurture conditions of stability which will sustain the current momentum of growth.

Overall, the message one gets is that we may see stable conditions prevailing in the interest rates regime to facilitate the momentum of investment and growth.

The economy has seen robust credit growth in the previous year, outstripping the increase in deposits with an incremental credit-deposit ratio of 100.75 per cent. It was, therefore, necessary to provide an interest-rate environment that is conducive to maintain the momentum of growth.

Capacity addition is taking place in the industry with substantial fresh investments in capital assets. Interest rates have been left untouched except for the reverse repo rate, the rate of interest at which RBI absorbs the excess liquidity of the banking system.

The reverse repo rate is hiked by 25 basis points from 4.75 per cent to 5.00 per cent. In an effort not to send a signal of even a marginal rise in the interest rates in the economy, the repo rate "" the rate of interest at which the RBI lends to banks against government securities is left untouched at 6 per cent by reducing the differential between the two rates from 125 basis points to 100 basis points.

The cash reserve ratio is left untouched at 5 per cent to ensure that adequate liquidity continues to be available to the banking system. The bank rate at 6 per cent also remains unchanged.

It is also noteworthy that although there is a word of caution about the scenario changing because of external developments, unlike in the past there is no indication of an upward bias in interest rate.