P.S.Shenoy : In Sync With Expectations

P. S. Shenoy

CMD, Bank of Baroda

The governor has succeeded in making his biannual credit policy a routine event, as the whole process has become a transparent exercise. Besides playing its regulatory role, the RBI governor was also expected to announce some measures to boost the sagging industrial growth and infrastructure financing.

In this backdrop, the measures announced by the RBI could be said to be in sync with market expectations. The reduction in bank rate is an extremely welcome measure. It is a much debated rate in the history.

While a segment of the market feels that the rate has lost its significant as the key rate with only SLAP facility attached to it and which few avail, others cite it as a benchmark rate critical for signaling the interest rate leaning of the policy makers.

 

The RBI governor can draw satisfaction from the fact that the softer interest rate regime has finally percolated to the other stratas, and a AAA corporate would now be in a position to raise five year funds at even lower than seven per cent and upto the bank rate of 6.25 per cent. The cut in repo rate would help ease any short-term liquidity problems of the banks.

The reduction in cash reserve ratio (CRR) would place additional funds in the hands of the banks. This measure coupled with other supplementary measures would assist banks in evolving a low interest rate structure beneficial to the borrower customer.

The agriculture production is going to be lower this year. The farm output is likely to fall by around 1.5 per cent this year. These aspects are real a cause for concern for the Central Bank.

The policy reiterates the fall in GDP growth rate due to the deficient rainfall in most parts of the country. The market has discounted the factor and the index fell to new lows. The policy is not likely to have much impact on the equity markets. The lower GDP forecast might impact the government borrowing programme to some extent.

The forward premium in the forex market is stable after the policy announcement. Though the interest rates have been reduced, the market participants have discounted the factor and the premia have not shown much change. Further, with the Fed Meeting expected in the next week for review of interest rates, any movement in the premia would be based on the outcome of the meeting.

Overall, the policy continues to support a low interest rate environment while imparting greater flexibility to market participants. In fact, the RBI needs to be complemented on sharing concerns and views of the market participants and initiating measures to bring vibrancy in the market.

The move to chart out a roadmap for further reforms is also welcome, as it removes the uncertainties from the minds of the market players. What is needed now is speeding up the reforms process so that initiatives get transformed into results.