Y.M.Deosthalee : Transcending Conventional Role

Y.M.Deosthalee

Director & CFO

Larsen & Toubro

The statement presented by the RBI governor this time is important because the policy transcends the conventional role of a Review and combines content with pertinent policy measures that should positively impact the system. This is understandable, as prevalent conditions are uncertain.

The monetary authority has been quite forthright in admitting that overall economic conditions have not turned out to be as rosy as were projected at the beginning of the year, and that the economy is in for an overall lower economic growth performance. The RBI certainly deserves to be commended as it has taken the right steps in tackling the problems that are confronting the economy.

 

The economy is expected to grow at a lower rate of 5-5.5% this year mainly on account of the drought. However, industrial growth is looking up as seen in its performance in the first five months of FY2003.

There are indications that industry will turnaround this year, which will necessitate support from the financial system. Monetary policy can help in this process on the supply side by making provisions for adequate liquidity as well as ensuring a softer interest rate regime.

The RBI has reiterated that these two goals have been the prime drivers of its monetary policy in the past. Hence, the cut in the CRR and bank rate are measures that have been announced to provide the necessary level of comfort to the economy even though the 25 b.p. reduction is not too significant in itself.

This will placate sentiment as market players were hoping for such changes to materialize in this policy. Hence, these changes should be viewed more as attempts to improve sentiment and provide the right platform to keep industrial growth buoyant, especially in a drought year.

The RBI has also pointed out that banks need to align their lending spreads above the PLR to ensure a more transparent system. Industry can hence, now look forward to receiving funds from banks at more reasonable interest rates.

The policy has also extended the facility of export credit at the PLR minus 2.5% from September 2002 to April 2003. This is a good move as it comes at a time when Indian exports have showed a smart increase in not too favourable global circumstances.

Further the reduction in the repo rate by 25 b.p. is expected to set a new benchmark for the call money rate, which in turn would lend a downward bias to GSec yields. The RBI has also hinted at introducing measures in course of time to deepen the repo market by probably allowing corporates to participate.

In terms of credit delivery, the policy has addressed the drought by increasing the limit on advances to dealers in irrigation/agricultural machinery as well as credit limits to artisans and village industries. Besides providing them relief, there would be positive impulses for the agricultural machinery and construction sectors.

However, with the economic slowdown in the country being a pre-dominantly demand-side manifestation, these measures would only provide a supply side solution and cannot be expected to be a panacea for the problems that afflict us today.

For this to happen, other pre-conditions such as fiscal action and overall domestic and global economic conditions need to change, which are beyond the purview of the monetary authority. Separate policies and effort are required on the demand side to support the monetary policy measures.

On the banking regulatory side, the policy has emphasized the need for the banking system to gear itself to the task of adhering to global best practices and prepare itself to meeting the requirements posed by the New Capital Accord. This again is quite pragmatic, as these are compulsions of globalization, which need to be adapted as quickly as possible.

On the whole the policy needs to be welcomed as it sends the right signals, provides liquidity without compromising on financial reforms.