The Hindu Business Line : `A comprehensive shift to inflation management'

"Controlling inflation and getting it back within the target range of 5-5.5 per cent is a bigger challenge today for the regulator than it has been anytime in the past 3 years."

Mr Ashvin Parekh

Chennai, Feb. 3 The focus of credit policy has shifted to inflation management, says Mr Ashvin Parekh, Partner, National Leader, Global Financial Services, Ernst & Young, commenting about the latest monetary policy statement from the Reserve Bank of India.

"Controlling inflation and getting it back within the target range of 5-5.5 per cent is a bigger challenge today for the regulator than it has been anytime in the past 3 years," he says.

"Consequently, the regulator has come out with measures that target the specific sectors that are fuelling this inflation by raising the repo rate to 7.5 per cent and an increase in provisioning requirements for these asset classes."

CRR (cash reserve ratio), SLR (statutory liquidity ratio), reverse repo and bank rates have been left untouched in order to ensure that overall industry growth is not impacted, reasons Mr Parekh. "An increase in the spread between the reverse repo and repo rates for the second time in a quarter to 1.5 per cent now appears to stem from the inability of the banking sector to raise further deposits, despite an increase in deposit rates."

With the increase in repo rate, Indian banks are now faced with improved spreads, and they are likely to soon improve lending rates within the next few days, foresees Mr Parekh.

"On the other hand, the need to curtail demand has led the Governor to target the supply of money in fast growing and risky sectors by increasing provisioning for real estate credit, credit card receivables, capital market exposure and personal loans."

The increase in provisioning for these assets helps reduce the over-heated growth in these sectors as well as improve the banks' positions against a fall, he explains. "There has also been an attempt to curtail flow of non-resident money heading into these sectors."

An important part of the RBI's latest review, according to Mr Parekh, is the emphasis on the liquidity and inflation management for the rest of the year.

The realisation that excess liquidity has impacted the effectiveness of monetary instruments has led the Governor to first improve the liquidity condition before more active use of the interest rate instruments, postulates Mr Parekh.

"The Governor has made it clear that he will continue to use interest rates, reserve ratios and open market operations in order to make the policy less accommodative. One could see more mid-quarter corrections in the rates over the next year if the situation demands."

The focus, therefore, has now comprehensively shifted to inflation management, concludes Mr Parekh.

"The Governor has been cautious in the steps taken in this regard in order to ensure that they do not result in curtailing growth in the general industry by raising the repo rate by 25bps (basis points) only and not more. At the same time, the industry sectors which have contributed significantly towards demand growth have been targeted by increased provisioning."

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