Tactical Tack

A significant statement is the RBI's intention to keep interest rates stable till the next mid-year review, which clearly shows concern over inflation

Vimal Bhandari

Executive Director, Infrastructure Leasing & FInancial Services

Despite inflation rate having been steady at about 6 per cent for some time now, the RBI governor has kept the growth stimulus going by chipping away 25 basis points off the bank rate and CRR. The bank rate being primarily a signalling device, the cut should send a strong signal from the RBI favouring continuance of the prevalent soft interest rate regime.

However, a significant statement is the RBI's intention to keep interest rates stable till the next mid-year review. This clearly shows the RBI's concern over inflation and the need to temper down any further expectation on growth impetus measures by way of rate cuts.

 

The RBI also seems to be clearly laying the roadmap by further liberalising the exchange control regime; the measures taken on foreign investments, forward sale contracts for foreign directo investment (FDI) inflows and permitting forward covers for foreign currency exposures denominated in rupees reflect the confidence of the RBI towards the outlook for the rupee.

The RBI has also addressed the issue of prime lending rates (PLRs) not reflecting the true market costs. The broad directions for computation of PLRs and the discontinuation of multiple tenor-linked PLR are positive measures towards reducing the inelasticity of the PLR curve to the general market conditions.

The introduction of over-the-counter (OTC) rupee derivatives has been largely as expected. Although, detailed guidelines are yet to be released, this should provide significant leeway to market participants and corporates to manage the balance sheet and associated risks on a more pro-active basis.

The proposal to allow non-banking entities and corporates to provide irrevocable guarantees for credit enhancement for issuance of commercial papers (CPs) is a welcome measure towards deepening the market for CPs.

It is expected more corporates would become eligible CP issuers and take benefit of the prevailing low rates in the market.