BS JURY

MONETARY POLICY 2006-07

R Ravimohan
MD & CEO, CRISIL

By leaving interest rates untouched, the Reserve Bank has signalled its confidence in continued inflows. The RBI is keeping liquidity in relative equilibrium, in the face of increased investment in the economy.

This indicates that the RBI is not overtly worried about a slowdown or reversal in flows to India, for the time being and is prepared to deal with it only as an exigency. The RBI has also taken the right steps to soft land a possible run-up in asset prices, by dictating prudent risk weightages to prevent uncontrolled asset appreciation.

Keki Mistry
MD, HDFC

Since the Reserve Bank of India had already taken pre-emptive action by raising the reverse repo rate in the last policy and inflation has been reined in at 5 to 5.5 per cent, the governor has taken the right step by maintaining interest rates.

While the central bank has been resorting to raising risk weights to curb banks lending to the housing and real estate sector, a more prudent policy would be to link the risk weight to the loan-to-value ratio. Thus only loans with a high loan-to-value ratio would qualify for a higher risk weight rather than a blanket increase.

Rakesh Jhunjhunwala
Partner, Rare Enterprises

The pace of credit growth has been tremendous in the last two years. This has led to liquidity drying up and pressure on interest rates. The unprecedented economic growth and the inflation in asset values have renewed calls for an increase in interest rates.

Despite all the economic growth, a significant part of population lives below the poverty line. We must not forget that reasonable and moderate interest rates are one of the important foundations for growth.

Y M Deosthalee
CFO, L&T

The policy reflects the bullish perspective on the economy. Contrary to the hawkish stance adopted by central banks across the world, the RBI has opted to continue the growth momentum through a conducive interest rate environment.

To ensure financial stability, there is an emphasis on credit quality and risk mitigation measures. By keeping rates unchanged, the RBI has shown confidence in the economy and market forces to decide on the cost of funds.

Dominic Price
MD, JP Morgan Chase

The policy is aimed at lengthening the Indian economy's recent stellar record on growth. A key issue emphasised by the central bank is the incomplete pass-through of higher global crude oil prices owing to heavily subsidised domestic fuel prices.

JPMorgan expects the government will hike local fuel prices in June, which will contribute to inflation. JPMorgan maintains that the RBI will hike the reverse repo rate by 25 basis points to 5.75 per cent at that meeting.

Sanjay Nayar
CEO, Citigroup India

The decision to keep rates unchanged is in line with expectations. The policy however sets the stage for future rate hikes depending on global tightening of interest rates, higher oil prices, inflationary expectation and rising asset prices.

The RBI has addressed concerns on quality and pace of bank credit growth to sensitive sectors like real estate and capital markets by increasing risk weights and provisioning norms for these sectors.

This is a much more directed and prudent approach as compared to a policy rate hike, which would have otherwise had an across-the-board adverse impact.

M B N Rao
CMD, Canara Bank

The Reserve Bank of India has done the right thing by leaving the key policy rates unchanged and at the same time hiking the provisioning as well as capital requirement in certain segments. This will spare the banking system in general and only affect certain banks.

Even within the home loan segment, only the high-value loans over Rs 20 lakh will be affected by this policy. So the banking system should not have any reason to complain.

Overall, the credit flow towards productive activities will not have any negative impact while speculative activities will get curbed.

Neeraj Swarup
CEO - India Region, Standard Chartered Bank

The annual monetary policy statement was a balanced assessment of growth in the wake of impending risks on the domestic and global landscape.

While the decision to keep rates on hold was unexpected "" we expected a hike in reverse repo and repo rates "" we believe the tone of the statement was that of "concern and watchfulness".

The policy statement is aimed at giving the markets enough lead-time to align their lending strategies and deposit mobilisation efforts, should economic conditions turn less favorable.

The consistent message that ran through the script was the need to bring about greater discipline and prudence in lending practices by banks.