The Hindu Business Line : Monetary imperatives

Perhaps more than any other Credit Policy Review in the last two fiscals, the one scheduled for early next week will point the medium term direction for the economy that is caught in a web of confusing signals — a rising inflation of around 6 per cent, a likely GDP growth of 8 per cent, and a policy of rising interest rates that has successfully mobilised deposits for banks authoring one of the highest credit growths in history but little else. So far, repo rate hikes have had little impact on inflation and credit growth. With the easing of the asset-liability mismatch, banks may be tempted to continue their lending with abandon though it is more likely that the demand for housing loans, for instance, will begin to taper off as interest rates climb into double digits. Depending on the way the Reserve Bank of India views the half-filled glass, it may just assume that its policies are working wonderfully and announce a further hike in repo rates to tighten up some more on the liquidity so as to curb credit growth further and, thus, according to its lights, ease inflation.

From a banker's viewpoint, the rate hikes so far have worked to the advantage of the system; savings are flowing back as deposits, and demand for credit still appears insatiable. So a further increase in interest rates will be par for the course. But a dear-money policy, aimed at skimming over the top demand, will squeeze further the producers and consumers so far left in the slipstream of the racing economy. No one, least of all the central bank, will deny that a large swathe of the country has had virtually no investment in decades and therefore no jobs and thus no credit coming its way to satisfy the basic needs of food and housing. A tighter money policy will make that fulfilment doubly difficult. The Centre is, of course, aware of this and its responses will be typical; banks may be pressured to lend to expanded lists of priority sectors. Enforced with vigour such pressures will create havoc in banks and help the poor little. Clearly, a new initiative is needed if inclusive growth has to become more meaningful.

The RBI's January 31 Credit Policy Review cannot ignore these imperatives while responding to an "overheating" economy. It is not dealing with a homogenous economy boiling over. Only a section is; the rest is on the backburner. The RBI Governor, Dr Y. V. Reddy, must, so far as the policy can, consider how best to use the fresh deposits at the banks' disposal to get the rest of the economy cracking.

More Stories on : Editorial | Credit Policy

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

Stories in this Section
Monetary imperatives

Curtailing benefit thru Executive action

On the trail of the missing `Indian concern'

Corporate farming

Tax treatment of FII income

To `firm up' or `calibrate' is RBI's dilemma

Land use by industry