The Hindu Business Line : Credit control

One of the more pleasant aspects of the latest quarterly Monetary Policy Review is the attempt by the Reserve Bank of India to be as predictable as possible, or at least less disruptive than it has been before. The notion that some elements of a tighter money policy would be announced was pretty much to be expected. While raising repo rates by 25 basis points and leaving other indicators of liquidity unchanged, the RBI Governor, Dr Y. V. Reddy, has tried to play both policeman and purveyor of optimism, the former by raising marginally the cost of capital for banks through the repo rate hike, and the latter by selectively pushing up the provisioning norms for certain categories of borrowers hoping thereby to catch inflation by the scruff and pull it back within the 5.5 per cent limit.

Lest the markets think the RBI is a killjoy, in its combat against inflation, the Governor has raised the bar on growth expectations jettisoning his earlier forecast and the prognosis of North Block for a 9 per cent GDP target for this waning fiscal. He has tried therefore to be all things to all men, in the bargain creating a dilemma that may not augur well for the economy in the medium to long term. The basic problem is that the RBI cannot hope to both fight inflation and propel growth to the levels it wants with the measures it has so far set in motion. Controls on credit expansion for select categories with inflation potential — capital markets and commercial real-estate — through higher provisioning may choke demand only if it is sensitive to the cost of credit. But in a booming economy, higher costs can be transmitted down the line; witness the rising housing loan rates. In many a high-flying sector banks may, therefore, still find takers for expensive credit. Regardless of the RBI's marginal increase in repo rates, the perception of a tighter money regime will push up interest rates all around, thus contributing to the price rise instead of combating it.

Given the nature of inflation, currently at a two-year high, the task of fighting it lies with New Delhi. The Government must put together a gamut of measures to remove the supply bottlenecks that are causing the price rise. The RBI admits that the growth in agriculture has "not been sanguine" with the declining output in major cereals pushing up prices. Focusing its Monetary Policy weapons on "credit quality" and, therefore, the health of the banking system, the RBI has prudently left this initiative to New Delhi.

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