Comments
The Annual Monetary Policy clearly indicates that inflation control has become a key priority area for the central bank in order to contain risks to future growth. Hence, the Reserve Bank of India has raised the key policy rates by 50 basis points (bps) each and made an attempt to keep a tight lid on monetary expansion during 2011-12.
The policy move has been facilitated by strong growth numbers in the form of improved rabi crop of 2010-11, improved core industrial output and PMI for the recent months, spiralling exports and a high topline growth for companies on the back of good demand conditions.
However, the RBI expects real GDP growth to settle closer to 8 per cent given the headwinds in the form of high domestic input prices, rising global commodity prices and some impact of past monetary policy actions.
Similarly, it has placed the headline inflation around 6 per cent (with an upward bias) on the back of domestic demand-supply mismatches, trends in global commodity prices and the likely demand scenario.
Price stability
Consistent with the broader objective of price stability, it has pegged the banking industry's aggregate deposits and non-food credit growth around 17 per cent and 19.0 per cent respectively. Besides, the RBI has warned against several downside risks to its economic outlook such as intensification of sovereign debt crisis in Euro area, high commodity prices, especially oil, abrupt increases in the long-term interest rates of advanced economies with implications for their fiscal paths and accentuation of inflationary pressures in emerging market economies.
The RBI has also taken several measures to improve the monetary policy transmission such as an increase in the savings bank deposit rates from 3.5 per cent to 4.0 per cent, increase in the provisioning requirements on certain categories of non-performing and restructured advances, restricting banks' investments in liquid schemes of debt oriented mutual funds and creation of a marginal standing facility (MSF).
To reduce the haziness around the policy signals, the RBI has made a shift to a single rate regime , which will be the Repo rate.
To address the liquidity issue, it has instituted facility whereby banks can borrow overnight from the MSF up to 1.0 per cent of their respective net demand and time liabilities.
Three concrete steps
To promote inclusive growth, the RBI has advised banks to reserve at least 25 per cent of the new branches to be opened during 2011-12 to tier 5 and tier 6 centres. It has warned the banks that they can classify their loans to micro financial institutions as priority sector advances if, and only if, they conform to the regulatory norms.
To improve the functioning of financial markets, the RBI has taken three concrete steps. First, it is going to shortly issue the final guidelines on credit-default swaps.
Second, it has decided to extend the period of short sale in government securities from the existing five days to a maximum of three months.
Third, it has given permission to foreign institutional investors to cancel and rebook up to 10 per cent of the market value of the portfolio as at the beginning of the financial year. The RBI has tried to steer a course between low inflation and sustainable economic growth by focusing equally on both short-term demand management issues and medium-term issues of financial deepening and inclusive growth.
(The author, Chairman and Managing Director, Bank of Baroda, is Chairman of Indian Banks Association.)
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.