Niall Booker : Promoting Introspection

Niall Booker

CEO India, HSBC

The bi-annual announcement of the credit policy is of tremendous interest to the markets. The expectation is always to the rate cut.

I would say that the Reserve Bank of Indias monetary and credit policy should now be seen as a forum for expression of the central banks views on the macro-economy and from there on the implementation of monetary policy best suited to the needs of the economy.

This is in keeping with current practice of central banks in other parts of the world. If the markets were anticipating rate cuts, cuts there were aplenty. 25 basis points each in repo rate, bank rate and the cash reserve ratio. By and large, one can say that the three were somewhat in line with market expectation though in differing degrees.

 

The CRR cut was perhaps somewhat unanticipated because of the current deluge of liquidity, the repo rate cut on par with expectation and the bank rate cut - a shade too little - given that it has now moved away from most market yields.

The RBI s assertion on the "stability" of the bank rate until 31 March 2003 is perhaps aimed at stalling runaway rallies in the bond markets on anticipation of further cuts. Somewhat surprising too was the fact that no cut was announced in the savings rate. However, given the number of parameters involved, these variances from expectation are not extraordinary.

There were other qualitative inputs as well. The low inflation levels that have persisted in the economy appear to have had at least two significant effects as far as the Central Banks policy is concerned -apart from making the rate cuts possible.

The RBI appears to become quite comfortable with the prevailing levels of interest rates on gilt yields and call rates. In the past, the Reserve Bank has appeared doubtful about the sustainability of these interest rate levels.

Also, the low rate of inflation aids the Central Bank in maintaining its present stance of purchasing the surplus Dollars in the forex markets and limiting sharp Rupee appreciation. The additional Rupee liquidity thus created could have been a problem otherwise. As it is, in the current environment, it even has a positive impact on GDP.

Apart from monetary measures, the policy is also a forum for implementing measures to streamline functioning and improve flexibility and stability within the financial system.

Much awaited was a possible announcement on the introduction of Rupee currency options. While this did not materialize, the activities of the working group that is being set up by the RBI for Rupee derivatives would possibly encompass such matters and will therefore be watched with interest.

On balance, the policy promotes introspection in the banking sector by encouraging banks to be more efficient in their operations and more customer focused.