P K Choudhary: The core skew

RBI ANNUAL POLICY 2004-05/ GUEST COLUMNS

~

P K Choudhary
Managing Director
Icra

The Credit Policy targets a 14 per cent M3 growth, consistent with an inflation target of 5 per cent and real gross domestic product growth of around 6.5-7 per cent during FY2005.

Considering the M3 growth projected, the aggregate deposits and non-food credit of scheduled commercial banks are set to rise by 14.5 per cent and 16-16.5 per cent, respectively. The M3 growth target hinges on the RBI's ability to neutralise the liquidity impact of capital inflows.

The policy has underlined several steps to enable banks to ensure greater availability of credit to the agricultural, small-scale and infrastructure sectors. Some of the initiatives, like widening the ambit of the priority-sector lending to include loans to cold storage units, are expected to enhance credit flow to the farm sector.

Also, the RBI has suggested the establishment of a debt structuring mechanism for medium enterprises so that banks can develop appropriate pricing strategies for them. Then, infrastructure lending has been extended to include the construction of educational institutions and hospitals.

The RBI has sought to expedite the process of aligning the Indian banking system with international best practices. It has also proposed that banks be allowed to raise long-term bonds for infrastructure financing.

This apart, the policy has proposed higher provisioning requirements against non-performing assets (NPAs) and unsecured exposures of banks. It has also suggested that by December 2004 banks identify a road map to the new Basel Committee recommendations, which would be in place by end-June 2006.

The RBI has kept the bank rate and the cash reserve ratio unchanged ""a move warranted by the current liquidity situation. Further, with growth in the rest of the world rising, the easing cycle for monetary policy in the developed financial markets may have ended.

However, if capital inflows remain strong, the RBI will face further challenges given that an increase in interest rates may provide a fresh impetus to capital inflows.

As for the GDP growth, the projection of a 5 per cent inflation rate calls for some comment. With monsoons projected to be normal this year, it seems the higher figure of 5 per cent presupposes growth across sectors. But is that plausible? May be the Union Budget for 2004-05 will throw more light on the issue.