Gunit Chadha : Deviating From A Non-Event

Gunit Chadha

Managing Director & CEO, IDBI Bank

The Mid-term Review of Monetary and Credit Policy announced by the Reserve Bank of India governor seemed to, nicely and welcomingly, deviate from the stated philosophy to make it a non-event.

As with all credit policy statements, predictions on the contents policy focused on the singular aspect of a possible rate cut. Opinions ranged from no cut to a shock 100 basis point cut to kickstart industrial activity out of its slumber. The governor, as if heeding to market expectations, more than obliged by cutting all the three benchmark rates by a uniform 25 basis points.

 

Expectations had centred around a cut in one or two of the three benchmark rates, and by that yardstick, the governor has delivered beyond common market expectations.

Whilst the aim of the policy statement is clearly to aid the flow of credit into industrial activity, it needs to be recognised, that there is limited leeway left with RBI, to take incremental monetary measures to boost economic activity, unless the infrastructure sector is given the much needed priority sector status.

Interest rates are at historic lows and at current levels of credit spreads (for AAA corporates) and the expected inflation level of four per cent per annum, the real rate of interest at which credit is available to these borrowers is extremely competitive.

Structural changes on other administered rates, empirical efficiency of the legal system in recovering dues from errant borrowers etc will drive further willingness and ability of lenders to lend to relatively lower grade credits.

Continuing the creditable reforms over the past on various fronts, it might be time to focus on some of the unfinished agenda. Administered prices by their very definition bring in inefficiencies in one form or the other.

Interest on savings account is one such area which needs to be addressed. As banks have invested in technology and people to improve quality and efficiency of customer service, it is only imperative that interest rates on savings accounts are aligned downwards to reflect consistency with other interest rates.

Ultimately, though I agree premature to fully de-regulate as yet, free pricing will automatically ensure fair price discovery and will obviate the need for banks to recover the costs of such administered priced products by way of other hidden costs.

On another account, somewhat minor, treatment of IFR as tier -I capital would be a welcome step and would augment availability of credit.

Overall, the policy has clearly delivered more than expected on and should have a positive impact on industrial activity in the economy.