Credit Offtake Will Have To Wait Till The Busy Season

The most important measure announced in the policy is the activating of the bank rate. Linking the bank rate to deposit rates and refinance rates gives it the much needed importance to be used as a money market intervention tool.

The reduction in the maximum bank deposit rate would lead to an all round reduction in deposit rates especially in the below one year maturity band. I also see sharp drop in yields of securities and rise in their prices.

The removal of MPBF would mean that issuance of Commercial Paper is freed altogether (though this is not stated explicitly). In any case having commercial paper for maturities of even upto 30 days, and with no restrictions on investments in debentures and preference shares, abolition of CRR/SLR on inter bank liabilities would all gradually lead to a tremendous surge in volumes in domestic money markets. In fact the removal of statutory preemptions on inter bank liabilities is the first major step down the road leading to the evolution of inter bank term rate. Certain other equally important measures like removal of restrictions on undertaking repos, enlarging the scope of eligible securities - like PSU bonds etc. For repos, it is hoped will follow. The dismantling of MPBF notwithstanding, I do not see any pick up in credit till the busy season sets in and provided the muddled political scenario is cleared. Nor would most of the banks jettison the concept in the near future.

 

Equally important are the relaxations in foreign exchange front allowing banks to book forward contracts for customers based on track record and also to run a swap book. These are two small but important steps which would gradually pave the way for capital account convertibility.

Alas but for a handful of foreign and new banks and 3 or 4 public sector banks, most of the banks are simply not geared to utilise the commercial opportunities that these changes offer. The imposition of CRR on NRI deposits is the only discordant note in the policy. If the intention is to stem the inflows, it ought to be done through a variation of interest rates. The switch-on-switch-off stance would hardly endear the central bank to either the banks or the investors.