The Hindu Business Line : Opportunity missed

THE RESERVE BANK of India Governor, Dr Yaga Venugopal Reddy, could have done better in the slack season Credit Policy than marking up the reverse repo rate (the return banks earn on funds parked with the RBI against securities from the central bank) to 5 per cent as it may set off a high interest regime. Yields on government paper will go up and with the Prime Lending Rate (PLR) of banks giving way to sub-PLR lending tied to quotes in financial markets, fund-raising for corporates and government will turn dearer. The price of money for triple-rated corporates will inch up to 8.5-9 per cent from 8-8.5 per cent and collecting short-term deposits could get less cheap for banks.

The Centre will not find it any easier to complete the net borrowings of Rs 110,291 crore this year (against the Rs 46,050 crore it borrowed last year). State Governments too have a job on their hands for in line with the Twelfth Finance Commission recommendation, the Centre will provide them only the grant part of the Central assistance. The States will thus have to hit the market on their own to raise loans to fill the funding gap. Banks are reluctantly active in auctions finding it hard to unload allotments in a burnt-out debt market and will prefer reverse repos to earn a clean 5 per cent. Perhaps, the RBI could have backed off from its pre-emptive stance on the evidence of excess liquidity in the system with around Rs 30,000 crore in reverse repo and around Rs 50,000 crore in the Market Stabilisation Scheme, which can be wound down to provide cover for economic growth. The RBI is perhaps worried by the high world crude and commodity prices pushing price indices beyond 5-5.5 per cent. "Credible commitment of policy to fight inflation is critical to stop translation of higher oil prices into wage-price spirals," remarks the Policy though it is all in the timing. The point is taken when the RBI contends that the ability to absorb fuel price hikes is "getting limited" with corporates having "a higher probability of gaining their pricing power with a better industrial outlook." Indian markets are today reconciled to crude prices remaining in the $50-60 range and corporate results do not suggest any panic (they have seen worse times).

But not all parts of the Policy Statement are so Kafkaesque about the morrow. Non-food credit in 2004-05 recorded the second highest growth in 55 years apart from there being evidence of "an increase in credit-elasticity of GDP and credit penetration." A large body of corporates has expansion plans on the table though these may be re-visited with interest rates climbing up. There is evidence of increasing productivity in several sectors compensating price pressures while the level of food stocks and forex reserves is nothing to quibble about. The current account deficit squared by a capital account surplus does suggest that the economy is wriggling out of a long slack. Then, there is the prediction of a good monsoon (always dicey), which could help agriculture grow by around 3 per cent. This year, the RBI has planned several chats with the market, over the First Quarter Review (July 26), the Mid-Term Review (October 2005) and the Third Quarter Review (January 24, 2006). That would help the RBI buy the future and avoid rushing the action today.

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