For continuity and flexibility

THE MONETARY AND credit policy announced by the RBI on Thursday is devoid of major surprises. But neither can it be described as pedestrian. Entirely consistent with the central bank's recent attempts at demystifying the monetary and credit policies, the latest statement is singularly devoid of any headline-grabbing announcements such as a variation in the bank rate or the reserve ratios. Over the past few years, including as recently as on April 1, the RBI has implemented some of those short-term measures judiciously to tackle specific exigencies but outside the framework of the monetary policy. Interestingly, beginning last year the monetary and credit policy statement has become an annual affair with a mid-term review slated for October. This has replaced the previous biannual statements - comprising of ``slack'' and ``busy'' season policies.

Consequently, the monetary policy statements are read more for their assessment and prognosis of the macroeconomy including the monetary sector. After taking stock of certain positive trends during 1999-2000 - substantial acceleration in the growth of industrial output, significantly lower inflation figures - the RBI has once again cautioned against the high level of fiscal deficits. The deleterious consequences of the latter are manifold: a sharp increase in the Government's repayment obligations and the inability of the market to absorb the large Government borrowings are two of the main ones. In turn they have made monetary management more complex besides spawning specific problems. For instance, banks continue to hold Government securities far in excess of their statutory requirements, clearly demonstrating a lack of depth in the gilts market. It also draws attention to another vexatious problem connected with the credit delivery system - the ``play safe'' attitude of bankers which of course monetary policy alone cannot alleviate. Non-food credit, however, grew by 16 per cent last year compared to 13 per cent in 1998-99. Whether the actual increase has been sufficient to fuel the ongoing industrial recovery remains to be seen.

For the current year 2000-2001, the RBI has set for itself the same monetary objectives as in the recent past - to provide sufficient credit for growth while ensuring that there is no emergence of inflationary pressures on that count. In its own assessment both these seem achievable at this point in time. Both the external and the domestic environment appear conducive at the moment but, as the RBI has rightly warned, the outlook can change dramatically within a relatively short time. There is a need always for the monetary policy to react quickly and to change course if and when required. The serious drought situation is one highly disturbing factor, and even on the inflation front - so far a success story - there is already a nagging worry necessitating a constant monitoring and vigilance.

A similar kind of realism permeates the RBI's assessment of the interest rate structure. While conceding that a much greater flexibility is desirable, the RBI points out that there are no quick-fix solutions to engineer a fall in the deposit and lending areas. Those are dependent on banks reducing their transaction costs, their level of non- performing assets and improving their risk management skills. Financial sector reform in its widest connotation along with a concerted programme to reduce the fiscal deficit are immediately required. Even if most of the above seem repetitive, they should not detract from the inherent merits of the RBI's policy statement. Continuity over its long-term goals and flexibility in its short-term operations are what the central bank has been consistently aiming at. Its recent policy articulation is a vindication of its stance. All the specific monetary measures announced are a continuation of those enunciated in the past. They will also further financial sector reform.

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Section  : Opinion
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