The Hindu Business Line : For financial stability

The Credit Policy statement comes amid mixed trends. While inflation is soft at 3.5 per cent, economic growth remains buoyant, along with robust monetary expansion and credit growth. The banking system is once again experiencing adequate liquidity following a bout of tight conditions through the last quarter of FY-06.

By holding the interest rates, the RBI has provided a breather to the banking sector, which has just come out of a liquidity crunch. Moreover, given that the Fiscal Responsibility and Budget Management provisions come into effect this fiscal, the central bank would now completely rely on primary dealers for subscription to the government's borrowing programme. Hence, a reverse repo rate hike would have carried the risk of creating a negative impact in the bond market and the RBI has done well to avoid this risk.

Despite the growth in domestic monetary aggregates along-with superior economic performance, as well as the global interest rate environment, the case for keeping rates on hold can also be justified on the basis of not adversely impacting the exceptional business momentum. Therefore, the central bank could afford to adopt a 'wait-and-watch' policy as it has managed to rein in inflationary expectations rather well.

The RBI has placed greater emphasis on financial stability and credit quality thereby facilitating a growth enabling environment. By hiking the provisioning requirements for standard assets in commercial real-estate, capital market and personal loans, the RBI has conveyed a message on credit pricing and asset quality in market segments which have witnessed abnormal growth.

Nevertheless, domestic and global macroeconomic trends indicate that the rate tightening cycle is yet to peak. To illustrate this point, GDP growth has topped RBI projections (8.1 per cent estimated for FY-06), M3 growth has overshot the target of 14.5 per cent y/y (20.4 per cent y/y) while credit growth has advanced 36.0 per cent y/y vis-à-vis the target of 19.5 per cent y/y. The WPI inflation has undershot estimates of 5-5.5 per cent as a result of incomplete pass-through of a rise in crude oil prices.

(The author is Managing Director and CEO, YES BANK Limited.)