The Hindu Business Line : Reclusive RBI

BY DROPPING ANCHOR in these troubled times, the Reserve Bank of India has done the sage thing in its First Quarter Review of the Annual Statement on Monetary Policy for 2005-06. Volatile crude prices, unsure monsoon, a hint of a dip in dollar inflows and a sharp pick-up in credit offtake in recent months add up to conflicting trends that sought a response from the RBI. But with the economy on a good clip, the central bank rightly did not want to disturb the rhythm. Key markers such as the Bank Rate, the Cash Reserve Ratio and the reverse repo have been left alone while risk weights (the quantum of capital banks should hold in their books) on exposures to real-estate and stocks have been marked up, hinting at the sources of RBI's discomfort.

Industry is doing well even as bank investments in corporate paper have dipped by 3.4 per cent (Rs 3,156 crore) till July 8 against a fall of 2.8 per cent (Rs 2,514 crore) in the same period last year. The total flow of bank credit has, however, gone up by 5.7 per cent (Rs 65,940 crore) against a rise of 3.6 per cent (Rs 31,758 crore). With industry and agriculture soaking credit, banks are turning a tad uninterested in government paper, which are lower by Rs 972 crore in the current year up to July 8 from the whopping Rs 52, 224 crore in the same period last year. Effective SLR (Statutory Liquidity Ratio) investment has dropped to 36.3 per cent of net demand and liabilities as of July 8 (the minimum SLR is 25 per cent) from 42.3 per cent a year ago, releasing that much funds for the private players. Banks seem to be turning to their prime business of lending. Perhaps, a worrying indicator is the dip in the RBI's net foreign exchange assets by Rs 20,941 crore against a rise of Rs 68,583 crore in the corresponding previous period while the dollars sterilised under the Market Stabilisation Scheme (as on July 15) are put at Rs 70,258 crore. Higher US interest rates could impact dollar inflows, though foreign institutional investors may still swarm the Indian bourses what with the indices knocking down milestones at a fast, but bothersome, pace.

The yuan revaluation "will not be a negative" on India, avers the RBI Governor, Dr Yaga Venugopal Reddy, and one can take his word for it. Indeed, excess rupee funds in the system under the MSS, the Liquidity Adjustment Facility and government cash balances total Rs 100,000 crore nudging banks to prune lending rates between March and June. Demand and term loans now quote 8-12.15 per cent and 8.15-11.90 per cent respectively against 9-12.50 per cent and 8.35-12 per cent in March; deposit rates have also inched up. A negative trade balance arising from crude imports and economic growth has been financed by invisibles and capital inflows. The script could alter as the Government may not be able to stall for long a rise in domestic prices of petroleum products if only to save the balance-sheets of oil companies. "The pass-through of crude prices continues to remain the most critical factor influencing domestic inflation," admits the RBI. This can, perhaps, be offset by widespread rains turning in sizeable kharif and rabi crops. Touch wood, the Indian economy may just be able to grow at around 7 per cent in the current year.

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