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+Credit Policy (2003-04)

CREDIT POLICY ON EXPECTED LINES, WILL STRIKE BALANCE IN GROWTH & INFLATION

Thesynergyonline Economic Bureau

NEW DELHI, OCTOBER 27 :
THE Associated Chambers of Commerce and Industry of India (ASSOCHAM) has described the Monetary Policy of the Reserve Bank of India (RBI) on expected lines which will strike a fine balance between growth and inflation.

In a statement, its president, Dr. Swati Piramal said that all growth drivers have been kept intact since the bank did not tinker with its existing repo rate, reverse repo rate and cash reserve ratio.

This is also indicative of the fact that RBI has set it's mood to review the ongoing interest rate regime in view of inflationary expectations in its next quarterly review policy, pointed out Dr. Piramal.

She, however, added that by effecting a modest increase of 1 per cent in statutory liquidity ratio (SLR) to 25 per cent, the RBI has also expressed its intention for putting a tab on growing inflationary pressures.

The ASSOCHAM Chief also said that provisioning requirement to commercial and real estate sector has been increased from 0.40 per cent to 1 per cent for standard assets is also a proactive step by RBI in view of large funding to this sector by commercial banks. (editor@thesynergyonline.com)



Mr. D K Aggarwal,
CEO & Managing Director,
SMC Wealth Management Services

THERE is a hike in SLR to 25 per cent but we think it will not have an impact because the total investment book of commercial banks is already at 30.4 per cent of total net demand & time liabilities. Although key rates of CRR, reverse repo and repo rates have been left unchanged, special repo facilities have been withdrawn.

Real estate loans provisioning are set to become more expensive. NPA norms for banks have been tightened while liabilities of scheduled banks arising from transactions in CBLO with Clearing Corporation of India will be subject to maintenance of CRR. The RBI is thus attempting to withdraw liquidity from areas where excess liquidity had reached a point it was more than comfortable with, while also targeting better quality management of credit.

In the policy stance, RBI has given first priority to keep a vigil on trends in inflation and be prepared to respond swiftly and effectively through policy adjustments to stabilise inflation expectations. Second, it will monitor the liquidity situation closely and manage it actively to ensure that credit demands of productive sectors are adequately met while also securing price stability and financial stability.

Lastly, RBI will maintain a monetary and interest rate regime consistent with price stability and financial stability, and supportive of the growth process. In conclusion, it bears emphasis that the Reserve Bank is mindful of its fundamental commitment to price stability. It will continue to monitor the price situation in its entirety and will take measures as warranted by the evolving macroeconomic conditions swiftly and effectively.

To sum up after discussing all the factors it is now believed that with the withdrawl of special liquidity measures together with a imposition of CRR in borrowing in CBLO market, RBI has taken a first to step towards controlling liquidty. With prioritizing inflation it is expected that the next step of RBI could hike in CRR as it has also reduced the indicative growth of Broad money to 17 per cent from 18 per cent.

Estimates from its professional forecasters' survey show a slower economic growth rate at 6 per cent for the current fiscal year (down from the earlier 6.5 per cent), reflecting the expected negative impact of deficient monsoons on agricultural output. On the other hand, inflation forecast for the fourth quarter has risen to 6.8 per cent (higher from the earlier 5.4 per cent).

Business confidence has improved, and demand conditions seem to have picked up, as seen by better order book and increased capital finance requirements. Industrial recovery seems to be on it's way with 5.8 per cent growth in IIP during April-August '09.

A revival in capital flows, and stronger performance of the core infrastructure sector (4.8 per cent for April-August '09) seems to be indicating a slight recovery in the economy. However, there has been a deceleration in growth of private consumption and investment demand, and raw material prices are expected to rise on account of inflationary pressures.

The deficient monsoon could also reduce rural demand. First quarter earnings of corporates reflect a decline in sales, and non-food credit growth has decelerated, with credit card and consumer durables related credit turning negative. Exports have continued to decline as external demand dependent services remain sluggish.

The economy is showing some signs of recovery, while a rising CPI has now pushed WPI into the positive territory, mainly on account of higher food prices. The RBI's stance will thus have to manage the trade-off between supporting growth and controlling inflationary pressures.

The current inflationary pressures that are visible are mainly on account of food prices reflecting poor monsoon and low kharif season productivity. But if see inflation by excluding food price inflation of around 14.4 per cent then the inflation is around -3.4 per cent.

There are certain factors that could neutralize the inflationary pressures stabilsation of oil prices seen in the last few months, adequate buffer stocks, prospects of better rabi crop, selective import of certain commodities.

Though the broad money growth has exhibited moderation & is around 18.9% till October 2009 but remained higher than the earlier indicative trajectory of 18, but if we look from the sources side it was largely driven by the government borrowing & to the positive 80% of the government programme has been completed.

Flow of money to the corporates through non banking sources increase marginally. In the first half the total flows more than 2.30 lakh crore compared to 2.28 lakh crore in the corresponding period. But the from the banking side the credit growth is yet to show improvement. The credit disbursal in the first half is around 1.07 lakh crore compared to 2.40 lakh crore.ose to 8 per cent in current fiscal and inflation would be moderated at 7 per cent by March 2009.

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