The Hindu Business Line : RBI policy review may be sooner than later

A copy of the RBI Annual and Policy Statement for the current fiscal was circulated to all scheduled commercial banks on May 18 - weeks before the Finance Minister is scheduled to present the Budget for 2004/05.

The report concludes with the statement that, as in the past, a review will be undertaken in October/November 2004, during which, in addition to macroeconomic and monetary developments, other changes and measures in regard to policy and projections in the second half of the fiscal year will be taken on board.

However, given the timing of the report, it is possible that some other changes may become necessary before that time.

After devoting 52 paragraphs to a review of domestic and external developments over 2003/04, the report goes on to spell out the RBI's stance on Monetary Policy for 2004/05.

The overall stance of monetary policy continues to be as follows: provision of adequate liquidity to meet credit growth and support investment demand in the economy while continuing a vigil on inflationary tendencies; and while maintaining the status quo in this regard, pursuing an interest rate environment that is conducive to maintaining the momentum of growth and macroeconomic and price stability.

Given the `pass through' of international price trends to domestic inflation, the inflation trend during 2004/05 is likely to be influenced to a significant extent by international oil prices and trends in commodity prices. The lagged effect of persistence of excess liquidity on aggregate demand, too, cannot be ignored, because of its potential inflationary impact.

On a point-to-point basis, the report places inflation during 2004/05 at around 5 per cent. Consistent with the real growth of GDP and inflation, the projected expansion of money supply (M3) has been placed at 14 per cent. The increase in aggregate deposits of scheduled commercial banks is set at Rs 2,18,000 crore, i.e. 14.5 per cent higher than 2003/04.

Non-food bank credit, adjusted for investment in commercial paper, shares/debentures/bonds of PSUs and the private corporate sector is projected to increase by 16 per cent to 16.5 per cent. This magnitude of credit expansion is expected to meet adequately the credit needs of all the productive sectors of the economy.

The states the Interim Union Budget had placed the gross fiscal deficit over 2004/05 at 4.4 per cent of GDP, with the net and gross market borrowing programme of the Centre being budgeted at Rs 90,502 crore and Rs 1,50,956 crore respectively.

Global factors at this juncture point in two directions for India. In view of the widespread anticipation that international interest rates may rise, there may be a case for raising policy interest rates. However, since such an increase may have an adverse impact on investment demand which has shown signs of pick-up after prolonged sluggishness, a case can also be made out for lowering interest rates to foster domestic investment activity in the given context of capital flows, on the assessment that interest rates in large economies may not rise soon, or to a significant extent - and inflationary pressures may not materialise.

While domestic factors point to stability, in the leading economies of the world there is a greater potential for tightening rather than easing monetary policies.

As regards priority sector lending, the RBI has already posted the Report of the Vyas Committee on its Web site to facilitate public debate on issues such as mandatory lending to agriculture by scheduled commercial banks; expanding the out-reach of banks in rural areas; reducing the cost of credit to agricultural borrowers; non-performing assets in agricultural finance; and impediments to the flow of credit to disadvantaged sections.

In the meantime, some of the recommendations of the interim report have been accepted by RBI for implementation: namely, loans for storage facilities; waiver of margin/security requirements for agricultural loans up to Rs 50,000 and up to Rs 5 lakh for agribusiness loans and `agri-clinics'; loans granted for short duration crops will be treated as NPAs (only) if the principal or interest remain unpaid for two crop seasons beyond the due date; loans granted for long duration crops will be treated as NPAs (only) if the principal and interest remain unpaid for one crop season beyond the due date. These prescriptions for crop loans would also be applicable to agricultural term loans.

The Vyas Committee, the report states, also examined the role of micro-finance in poverty alleviation and adoption of self-help groups in extending bank outreach to the disadvantaged sectors.

In view of the need to protect the interests of depositors, and on the basis of the Committee's Interim Report, the RBI has decided that micro-finance institutions would not be permitted to accept public deposits unless they comply with the extant regulatory framework of the Reserve Bank.

As regards the Policy Framework for Small and Medium Enterprises, the RBI will soon put in the public domain the Report of the Working Group on Flow of Credit to the SSI sector. In the meantime, a special Group will be constituted by the RBI to suggest appropriate operational guidelines to enable banks to determine the appropriate pricing of loans to small and medium enterprises.

About the Gold Card Scheme for Exporters, the report states that the Ministry of Commerce and Industry, in consultation with the RBI had indicated in the Exim Policy 2003/04 that this scheme would be worked out by the Reserve Bank for creditworthy exporters having a good track record, for easy availability of export credit on the `best terms'.

Accordingly, in consultation with select banks, such a scheme has been drawn up. Salient features include preference in the matter of packing credit in foreign currency, and the consideration by banks of waiver of collateral and exemption from ECGC guarantee schemes.

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