The Hindu Business Line : Keeping growth on a stable path

A well-structured, well-articulated policy that reflects a sincere attempt to keep the growth of the economy on a stable, non-inflationary path while focussing on all the issues that have raised the concerns about financial stability.

THE RBI Review has been along the lines of the statement announced in April.

By responding to the concerns over price stability and exchange rate depreciation (by raising the repo and reverse repo rates 25 bps each), it has shown its strong commitment to "inflation targeting".

By keeping the bank rate untouched, the RBI has given a signal of stability in the lending rates for the medium term.

The RBI has comforted market players by reiterating active demand management of liquidity through open market operations and using policy instruments flexibly.

By raising the growth forecasts of real GDP from 7per cent to between 7 per cent and 7.5 per cent, the RBI has reasserted its confidence in the present growth momentum and sent a positive signal to international investors.

The RBI has attempted to encourage growth of infrastructure and textiles by revising the External Commercial Borrowing (ECB) norms for them. In the area of credit delivery, banks have beenadvised to fix their own targets for financing the SME sector so as to reflect higher disbursement.

The banks have also been advised to formulate liberal and comprehensive policies for extending loans to the sector and rationalise the cost of loans with cost linked to credit ratings. This will go a long way in generating incomes and employment.

Further, the Micro-finance Development Fund set up under NABARD has been re-designated Micro-finance Development and Equity Fund (MFDEF) and its corpus has been increased from Rs 100 crore to Rs 200 crore. The modalities in this regard are also being worked out. Together, these two measures will enhance credit flow to hitherto credit-starved sectors.

In the banking arena, the special measures are permission for intra-day short selling in government securities that will boost volumes in this market via better price discovery and a hike in those banks' exposure to capital markets, which have sound risk management capabilities.

The second measure will enhance the income generation possibilities for banks with sound risk management systems.

It is important to note that by asking the Indian Banks' Association to issue transparent guidelines for appropriate pricing of credit, the RBI has expressed concern over the present mis-pricing of loans in certain segments. By proposing a thorough revival of co-operative credit system and introducing "no frill" accounts either with "nil" or very low minimum balances the RBI has shown its continued commitment to financially disadvantaged sections of society.

In the interest of "financial stability", the RBI has decided to initiate a supervisory review process with select banks having significant exposure to sensitive sectors, such as real estate, capital markets, highly leveraged NBFCs, and so on.

In nutshell, this is a well-structured and well-articulated policy that reflects a sincere attempt to keep the growth of the economy on a stable, non-inflationary path while focussing on all the issues that have raised the concerns for financial stability.

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

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