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A slick balancing act

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Rana Kapoor

THE Credit and Monetary Policy comes in the backdrop of high oil prices, unprecedented growth in non-farm credit and a massive government borrowings programme. However, economic conditions continue to remain strong with robust growth in manufacturing and services and, hence, by hiking the reverse repo rate to 5 per cent, the RBI has responded well to curtail supply side inflationary pressures.

Internationally, the impact of persistently higher energy prices is likely to lead to a slow down in GDP growth in the US. However, US interest rates are still trending higher and the Fed fund futures see the Fed target rate at 4 per cent by December. With India rapidly integrating with the global economy, and interest rate pressures building up world-wide, the RBI has done well to move in tandem.

A few concerns on inflation persist, despite the WPI inflation rate having decelerated to 5.48 per cent from a peak of 8.70 per cent in August 2004. However, at the current level, inflation appears to be muted and has been cushioned from the high base of last year. The RBI's inflation projection at 5-5.5 per cent is fairly realistic given that demand side pressures are being responded well by increased capacity utilisation and new capital formation.

Though there may be a opinion that the hike in reverse repo rate is a somewhat premature but it will significantly facilitate mitigating uncertainty in the market on higher interest. While the Government's high borrowing programme and the accelerated growth in non-farm credit will put pressure on liquidity, the RBI is in a position to infuse adequate liquidity by unwinding the Market Stabilisation Scheme, as it has stated in the Policy. This will ease pressure on liquidity demands.

The buoyant domestic industry growth rates and the expectation of sustaining these impressive growth numbers place considerable onus on the credit rates for industry. However, Indian industry will continue to benefit from credit rates at current levels, which will significantly enable industry to maintain the existing growth thrust.

Retail customers have no reason to worry about interest rates on home, car and educational loans. We saw these rates bottoming out about two years back after which we have seen some amount of marginal upward revision. These rates have stabilised now and are likely to remain steady in the near term. Hence, it is fair to say that on the back of steady credit rates, the economy will continue to grow at its imposing current pace.

The Policy also urges banks to refocus on deposit mobilisation and empower the depositors, by providing wider access and better quality banking services. It is heartening to see the RBI persisting with its fine efforts to ensure the highest quality of banking services, in particular, to small individual depositors. Overall, the Policy is a clearly progressive one, with equal emphasis on price stability and maintaining the growth momentum.

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

(This article was published in the Business Line print edition dated April 29, 2005)
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