Milind Barve : The Price Stability Message

Milind Barve

Managing Director

HDFC Mutual Fund

Apart from a cut in most policy rates, including Bank Rate, Repo Rate & CRR, there are some important underlying messages in the Credit Policy Review Statement.

Primary among them is the reiteration of the fact that one of the major objectives of monetary policy should be price stability.

This assumes importance as the current interest rate regime has been supported by low inflation, leading to the inference that inflation may contribute in no small measure to the future direction of interest rates.

Another emerging theme seems to be reducing relevance of Bank Rate as a policy tool. While the policy states that Bank Rate will remain unchanged till April 2003, it also mentions the weakening link between Bank Rate and market determined rates.

 

Also, the policy stance continues to be one with a preference to soft interest rates.

As a result, it seems that this reducing relevance has been accepted, and in coming days one may see Bank Rate relegated to the background, with policy intervention restricted to other policy rates like the Repo and Reverse Repo Rates.

This argument is further buttressed by the reduction in the extent of Export Credit Refinance available at Bank Rate. This change will allow the RBI to be more flexible and proactive in responding to market needs in the future.

The strong defense of the Exchange Rate policy as well as the growing level of Foreign Currency Assets augurs well for future developments in this context. The fact that reserves have increased over the recent past without any recourse to external borrowings has found pertinent mention.

Other structural changes that have been made on the margin with the intention of deepening specific market segments like Repos should benefit the market over the medium term.