The Hindu Business Line : `A stick-to-the-basics policy'

THE overall stance of RBI's credit policy is to provide appropriate liquidity to meet credit growth and support investment and export demand in the economy while placing equal emphasis on price stability, said Mr Viren Mehta, National Leader, Global Financial Services, Ernst & Young India.

According to him, it is a `stick-to-the-basics' policy.

Volatile and increasing oil prices in international markets, he said, will continue to exert upward pressure on headline inflation. The impact of increased prices has not yet been absorbed. The RBI policy has acknowledged this aspect, and this could singularly affect the GDP growth story.

The overall GDP growth for 2004-05 in the range of 6.0-6.5 per cent will be reasonable, assuming that the combined downside risks of high and uncertain oil prices and sudden changes in international liquidity environment remain manageable. Even with this rate of growth, India will be among the faster growing economies, said Mr Mehta.

The need for inflation targeting, according to him, is evident. Expectedly, the repo rate has been increased by 25 basis points and other liquidity control measures have been announced. Inevitably, this will result in a further upward push to interest rates.

The policy, he said, did not shed any light on the much-debated issue of guideline on ownership and governance. Many foreign and private banks, which are eagerly awaiting these prior to planning their next moves for India, will have to wait some more.

The policy tries to justify the classification of securities held for SLR purposes as HTM and not subjecting it to MTM variations. This is not in sync with RBI's overall move towards international best practices.

Mr Mehta believes that while the impetus provided to delivering credit to the agricultural sector is laudable, similar stringent mechanism to trap cash flows and other structural steps to collect interest and loans repayments must be actively implemented. Enhancement of ceiling of banks' direct finance for housing to Rs 15 lakh is a right step.

However, increasing the risk assigned to such loans may partially offset this drive. The increased risk weights on personal loans and credit cards will not encourage the banks to rural markets, according to Mr Mehta.