P.K.Choudhury : Developing Orderiliness

P.K.Choudhury

MD, Icra

The monetary and credit policy is a continuing reflection of the RBI attempt to promote orderly development of the financial markets, ensure reasonable liquidity, and lend stability to interest rates. The policy statement reaffirms the shift in the RBI orientation from a monetarist to a structuralist one.

The structuralist flavour of the policy is not surprising, given the gradual transformation of the hitherto illiquid and segmented Indian financial markets into more integrated and closely-knit ones. The movement has already prompted the regulatory bodies to play facilitators.

As for the watchdog role of the regulators, this, I believe, could be gradually relegated to independent and credible institutions like credit rating agencies.

 

The cut in the bank rate and the cash reserve ratio (CRR) by 0.25 percentage points is a welcome step and should cheer up the market. Interestingly, the RBI has explicitly acknowledged that a cut in the bank rate is no longer a sufficient condition for a corresponding cut in lending rates.

The downward rigidity in lending rates is now more a function of structural constraints than otherwise. Credit offtake, for all practical purposes, has been constrained by the lack of adequate demand for funds from financially sound corporate entities in recent times.

The cut in CRR has also been evened out, with an increase in the minimum reserve that scheduled commercial banks must maintain with the RBI to 80 per cent. This I believe is to discourage the government from overshooting the budgeted borrowing programme.

In the current fiscal, the ratio of gross borrowings to net borrowings has shown a marginal improvement. This implies that the government receives only 67 paise in net terms for every rupee of fresh borrowing.

The RBI has done a commendable job in controlling money supply (M3) growth within the projected trajectory of 14 per cent. There is an additional reason for keeping the M3 growth target low: this would buttress the expectations of low inflation and keep the long-term interest rates within reasonable limits.

As for the establishment of a working group to oversee the derivative market, although the move would enthuse market participants, the RBI refraining from announcing any policy guidelines for the development of STRIPS (Separate Trading of Registered Interest and Principal of Securities) would be a disappointment.

It has preferred to shelve the unfinished task of deregulating savings bank deposit rates. This would please commercial banks, since deregulation would have pushed up their cost of deposit mobilisation.

The policy projects the GDP growth rate at 5-5.5 per cent, which appears reasonable, though our expectation is that it would tend to be somewhere in the lower end of this band.

Overall, the policy should serve as a feel-good factor in a year of institutional bailouts. In the long term however, this psychological boost would have to be backed up by credible fiscal policy reforms.