The Hindu : Opinion / Editorials : A well nuanced credit policy

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Friday, Apr 29, 2005

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A well nuanced credit policy

The credit policy statement of the Reserve Bank of India for 2005-06 follows the pattern set by the previous policies in all crucial areas. The monetary stance for 2005-06 is identical to the one set out in the mid-year review of October 2004: it includes provision of appropriate liquidity to meet credit growth and investment demand while placing equal emphasis on price stability. As has been the case in the past, the latest policy statement steers clear of sensational announcements. The widely anticipated 0.25 percentage point increase in the reverse repo rate, the rate at which the RBI borrows money from banks, is the only major measure likely to have an immediate impact. The bank rate and the cash reserve ratio remain unchanged. In October last year, the reverse repo rate was raised by 0.25 percentage point and slightly earlier the CRR was hiked in two stages by 0.50 percentage point to remove Rs.8750 crore of liquidity. The bank rate, now at 6 per cent, is probably falling into disuse again while a CRR increase goes against the spirit of the reform agenda to phase out statutory pre-emptions.

Besides, the preference for short-term monetary measures is consistent with the goal of calibrating policy responses to the emerging environment in India and abroad. The biggest worry is inflation that might cloud the generally positive economic outlook for this year. Oil prices continue to rule high and might force an increase in the target inflation rate of 5 to 5.5 per cent for the year. The tasks of containing inflationary expectations and consolidating the hard won gains are therefore particularly challenging. The non-food credit growth during 2004-05 has been the second highest in the last 55 years. There is a need to sustain its momentum for the sake of the ongoing industrial recovery and simultaneously facilitate the large government-borrowing programme planned for the year.

The external sector continues to show resilience. Domestic interest rates cannot remain isolated from developments in the U.S. where they are gradually being pushed up. In India the current account has recently turned into a deficit after having been in surplus for three consecutive years. Capital inflows, which are guided by interest rate considerations, are expected to be crucial for the balance of payments in the coming years. The RBI's forecast of GDP growth at 7 per cent for the year looks realistic. In a well thought out shift in the style of monetary policy, the Bank proposes to interact with the markets and the public at large more frequently through quarterly reviews. That will have the salutary effect of demystifying monetary policy issues, a stated objective of the Bank.

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