• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy
• Books

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

Saugata Bhattacharya

The RBI’s Monetary Policy statement for 2009-10 needs to be seen in the context of the series of extraordinary measures it had taken since September 2008, when it first reversed course from the tightening stance and started easing aggressively in response to the large financial shocks from the failure of Lehman Brothers and AIG. The RBI has responded in a very consistent and proactive manner, while managing multiple objectives, and today’s measures plug some of the gaps left from previous policy initiatives.

The main objectives were to bolster the growth environment, while mitigating the potential risk of inflationary pressures. The primary monetary policy mechanism was a reduction in the cost of funds available to borrowers. These costs had initially soared through an extreme contraction in liquidity and an increase in counterparty credit risk perceptions. Although the latter was not relevant for banks, access to foreign capital was squeezed.

The primary channel for funds delivery being the banking sector, it was necessary to reduce the costs of funds for banks, to enable them to prudently meet borrowing requirements at a reasonable interest rates. Huge infusions of liquidity were made into the system. In addition, there were multiple refinancing facilities, and a series of measures to offer foreign currency liquidity facilities to both banks and corporates.

But cost of funds is only one of the multiple factors in determining lending costs. The risk environment plays a big role in risk pricing of lendable funds. If banks perceive that credit quality might suffer in a cyclical downturn, they will put a high risk premium in lending to riskier borrowers.

The RBI has sought to moderate this premium through multiple measures designed to address various aspects of risk pricing. The most explicit was through regulatory forbearance: Banks were allowed to restructure distressed assets, with provisioning requirements that were (ultimately) lighter than those for potential NPAs.

One of the key impact sources for India’s economic activities have been exports. While there is little that monetary (or fiscal) policy can do about the demand constriction from developed country markets, the RBI had attempted to address the sharply increased cost of foreign currency funds for exports. This has involved dollar swap facilities to banks, relaxations of ceilings on export credit tenors and their interest rates. There have also been relaxations in the corresponding foreign currency funds, mainly FCNR deposits, which are the primary sources of export finance.

Other than these measures, which are designed to address credit frictions, there are also measures designed to create more efficient and competitive financial markets, which will aid in making the monetary policy transmission channels more precise in future.

More Stories on : Credit Policy | CRR & Bank Rates | Economy

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

Copyright © 2009, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line