The Hindu Business Line : Priority for priority sector

THE Slack Season Monetary Policy for 2005-06 unveiled by the Reserve Bank of India strongly reflects the current developments in the local and global financial markets.

As in the other parts of the globe, the major worries before Indian policy-makers are rising oil prices, rising inflationary expectations and upward pressure on long-term interest rates.

The RBI Monetary Policy has responded to these conditions by marginally hiking the reverse repo rate by 25 basis points to 5 per cent.

Though this increase is moderate, it definitely signals an upward bias in interest rates. However, by targeting monetary growth at 14.5 per cent in 2005-06 (against 12.8 per cent last year), the RBI has ensured provision of appropriate liquidity to meet credit growth in the coming year.

Thus, an effort has been made to stabilise inflationary expectations by effecting a moderate increase in the benchmark short-term rate. The status quo on cash reserve ratio (CRR) is also justified given the present liquidity conditions in the country.

In order to avoid the cut-throat competition in deposit mobilisation, the RBI has not touched the administered interest rate on savings deposits for the time being. The RBI's decision to continue the status quo on the interest rates on NRI deposits, however, needs a re-look sooner than later.

As is well known, the appetite of FIIs for emerging markets' assets has been steadily declining. To encourage more stable capital inflows, it would help if the cap on interest rates offered on non-resident deposits is raised or removed at the earliest.

The Monetary Policy has continued the emphasis on priority sector lending, especially agriculture credit.

The measures announced in this direction are — increasing the limit on loans to farmers through the produce marketing scheme from Rs 5 lakh to Rs 10 lakh under priority sector lending; setting up of an Expert Group to formulate strategy for increasing investment in agriculture; proposal to survey and assess customer satisfaction on credit delivery in rural areas etc.

The RBI has also decided to review all its guidelines on financing the small-scale sector, debt restructuring, nursing of sick units, etc., with a view to rationalising, consolidating and liberalising the SSI units. This is particularly important given the huge untapped growth potential in these sectors.

A number of noteworthy initiatives are taken relating to call/notice money markets. The phasing out of non-bank participants from the call/notice money market has been as per the RBI Plan.

A reduction in the minimum maturity period of certificate of deposit from 15 days to seven days would benefit companies and other eligible investors to deploy their short-term funds more profitably.

There are other important measures to make the G-sec market more vibrant. Some of these are the stadardisation in settlement system to T+1 basis and the electronic trading platform for conduct of market repo operations in government securities.

The Policy has dealt closely with many critically important prudential matters such as the mergers and acquisitions between private sector banks and NBFCs, supervision of financial conglomerates on a half-yearly basis, etc.

The RBI has also urged the banks to refocus on deposit mobilisation and reduce their dependence on other sources of income, as deposit growth has been significantly lagging credit growth.

Banks have also been urged to try and improve access to financial services by the underprivileged to bring them into the ambit of organised sector.

Another important step in the direction of improving the quality of banking services is the plan to set up the Banking Codes and Standards Board of India for the fair treatment of customers. These measures will certainly contribute to the long-term growth of the credit market in India.

On the whole, the slack season monetary policy has finely balanced the objectives of stabilising inflationary expectations, maintaining growth momentum and market-making.

(The author is Chairman and Managing Director, Bank of Baroda.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Importance of India for China

Opportunity missed

Banks asked to refocus on deposit mobilisation

Right emphasis on growth and liquidity

More inward-looking than warranted

A slick balancing act

Reflects buoyancy in economy

Priority for priority sector

Govt borrowing may cost more

The RBI's shifting focus

Stinging remedy

Reliance Industries

Cash transaction tax