The Hindu Business Line : Reinforcing the pro-growth stance

In his maiden Annual Monetary and Credit Policy review, the RBI Governor, Dr D. Subbarao has reinforced the central bank’s pro-growth stance amidst a highly challenging global environment.

While the central bank has regularly emphasised its commitment to boosting real economic activity while preserving financial stability, the slowdown in India’s growth momentum in the wake of adverse global developments has been sharper than expe cted. The central bank’s 0.25 percentage point cut in key interest rates, going beyond wider market expectations, signals willingness to step in and stimulate growth even as the full pass-through benefits of previous rate cuts is yet to fully transmit to the real economy.

Testing times

Clearly, these are testing times. In recognition of this, the overall stance of monetary policy has also evolved to recognise and respond in such a way as to mitigate the downsides from a sharply degenerating global economy, and enable credit expansion at reasonable costs while preserving credit quality.

While the RBI’s token cut of 0.25 percentage points in its key policy rates — both the repo and the reverse repo — underscores a strong pro-growth stance, the central bank has tempered the growth expectations — real growth is now seen at 6.5-6.7 per cent for FY09, a downward revision from the 7 per cent estimated earlier, while FY10 GDP growth is seen at 6 per cent, on uncertain global cues. Inflation is now a receding concern, projected to be at 4 per cent at end-March 2010 even though it is expected to enter negative territory in early 2009-10; a statistical play.

Systemic liquidity has improved significantly and monetary policy actions taken since September 2008, have translated into a huge liquidity support of over Rs 4,22,000 crore, nearly 8 per cent of India’s nominal GDP.

Extension of refinance facilities and continuation of open market operations despite very easy liquidity, among others, underline RBI’s assurance of strong liquidity support to facilitate growth.

The overall tone of the monetary policy remains dovish. The key challenge for monetary policy has been to accommodate higher government borrowings along with ensuring adequate credit flows to productive sectors to stimulate the economy at reasonable costs.

Monetary transmission

The RBI has emphatically addressed this by providing huge comfort on the liquidity front. However, the key question now centres on the effectiveness of monetary transmission. While the RBI has indicated the need for term structure of interest rates to correct lower, it also emphasises the need to monitor asset quality, noting that the challenge (for banks) is to maintain asset quality through early actions, calling for a focused approach, due diligence and balanced judgment by banks.

While banks work on re-pricing their balance-sheets and adjust for previous higher funding costs, the current monetary easing cycle has spanned only six months, as opposed to the monetary tightening which was evident up to September 2008.

In the near-term however, the challenge lies on the demand side as well, since private sector credit demand is still subdued. It is imperative for macroeconomic indicators and business sentiment to improve and translate into higher credit demand, before any meaningful turnaround is visible in the real economy.

(The author is Managing Director & CEO, YES Bank.)

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