The Hindu Business Line : <I>Focussed measures </I>

With most other central banks primed to raise rates, it is unlikely that the RBI can stave off pressures to hike rates. With most other central banks primed to raise rates, it is unlikely that the RBI can stave off pressures to hike rates.

Romesh Sobti

The RBI Governor, Dr Y. V. Reddy, has chosen to press the `pause button' in the Credit Policy and kept all the signal rates — the reverse repo, repo and bank rates — unchanged. After a surprise hike in the repo rate in January and an acute shortage of rupee liquidity till recently, this action will provide some respite to banks.

A benign inflation environment has certainly helped, but the decision also suggests that the RBI is concerned about the dent that the unanticipated liquidity crisis of the first quarter has left on bank margins. This does not however mean that the RBI has abandoned its concerns on the deteriorating quality of bank assets. Instead of using a `macro' instrument like a policy rate to tackle this, it has chosen more focused measures. It has, for instance, raised the general provisioning norms for standard assets from 0.4 per cent to 1 per cent for certain specific categories.

These categories are personal loans, commercial real estate loans, loans against shares and housing loans above Rs 20 lakh. Risk weights on commercial real estate lending have also been raised to 150 per cent from 125 per cent. These measures would raise the banks' cost of these loans and it is quite likely that higher costs would be passed on to customers in the form of higher rates on these loans. Housing finance rates may not go up due to the competition and also because most banks recently re-priced these loans upwards.

Pressure on interest rates

The fact that rates have not been raised this time does not however mean that no more hikes are likely. Going ahead, the RBI may continue to pursue further monetary tightening and it is quite likely that it would consider raising policy rates in July. With GDP growth expected to be in the 7.5-8 per cent, demand conditions in the economy would remain buoyant. Moreover, the pass through of hardening international crude prices to domestic prices is still incomplete and local prices will catch up in the year ahead.

The RBI makes it abundantly clear that it sees risks to the current benign inflation scenario stemming from factors such as rising global prices of commodities and robust local demand. With most other central banks primed to raise rates, it is unlikely that the RBI can stave off pressures to hike rates. The monetary policy appears to be more proactive than earlier focus on the issue of institutional changes in the debt market. These are long overdue and are critical if the domestic debt markets are to survive. s

The RBI has also taken a critical step in ensuring greater transparency of service charges of banks for their retail and corporate customers. Banks are now mandated to display the details of their charges in their offices and branches in an TBI-approved format.

(The author is Executive Vice-President and Country Representative - India, ABN AMRO Bank NV.)