Sanjay Nayar : Consolidating On Past Initiatives

Sanjay Nayar

CEO India, Citibank

The latest policy focuses on continuity of monetary policy and emphasises the need for flexibility in the deposit and lending rates. The RBI is also consistently moving towards deepening the debt capital markets and strengthening the overall financial infrastructure.

Significantly, the central bank is also cautiously optimistic on the economic prospects for the current year despite a poor monsoon.

The RBIs decision to cut all the three rates- repo, bank rate and CRR together by 25bps is a pleasant surprise, and is in line with its intention to maintain a softer interest rate environment.

The CRR cut decision in the backdrop of high liquidity is in line with the RBI strategy to encourage credit growth by ensuring that the system is awash with liquidity.

 

On the interest rates, the RBI has rightly acknowledged the limited linkage between the bank rate and general lending rates but urges banks to relook at their lending rates bands.

This credit policy is a balanced score card for the banking system and the economy in general. The RBI has provided a clear cut direction of what it perceives to be the economic realities and what it would like to see the financial sector do in the next couple of years.

Though the RBI has cut its GDP forecast, the underlying message is that there is a mild and sustainable recovery for industry and exports, which should not be allowed to slip away. The suggestions on interest rate flexibility and management of PLRs with transparent bands so as to ensure better credit availability must be seen in this context.

However, the poficy does not comment on some concerns of the recent past. The policy emphasises that interest rates are now predominantly dependent on the inflation rates, but does not comment on the rising deficit levels of governments and their impact on the interest rate structure and the rising incidence of defaults by state government entities and the fallout on bank assets.

On the external side the RBI, justifiably, dwells on the gains made in the last decade resulting in strong reserves and currency position at a very low cost to the economy. The status report on the various working groups, review of technology upgradatton and legal reform developments is welcome as it shows a keen focus on the medium and long term.