The Hindu : A well thought out policy

Online edition of India's National Newspaper
Tuesday, Apr 30, 2002

Opinion

Opinion - Editorials

A well thought out policy

THE MONETARY AND Credit Policy for the year 2002-03 is, as expected, devoid of any sensational announcements. There is only one modest concession — by way of a 50 basis point reduction in the CRR — to the ever-persistent lower interest rate lobby. The bank rate remains unchanged as also the last of the administered deposit rates, on savings bank accounts which stays at the existing 4 per cent. The latest pronouncement fits into the mould of all preceding policy statements which have emphasised medium to long range monetary goals including reform measures in preference to short-term measures. On more than one occasion in the recent past, the RBI has shown that it can adopt a highly flexible stance in dealing with specific problems. Thus, speculative attacks on the rupee were immediately countered by sharp, though temporary, liquidity-diminishing measures including a hike in the CRR and physical controls on foreign exchange trading.

Few can fault the RBI's basic premise that despite the relative comfort achieved in macroeconomic parameters that have a direct bearing on monetary and credit policy there ought to be neither complacency nor a deviation from the well-articulated policy stance of recent times. The latter has included the following core items: provision of adequate liquidity to meet credit growth and investment demand while continuing a vigil on the price front, a preference for softer interest rates and more flexibility in the medium term rate structure. Monetary management, as the RBI points out, has become infinitely more complex today on account of certain well-known though less understood factors such as the ongoing integration of financial markets worldwide, the phenomenal increase in the financial turnover, economic liberalisation and the new technology environment which makes possible the transmission of unanticipated domestic and international tremors across the globe at lightning speed. One specific central bank direction through this policy is aimed at capping the risks of money market players whose overdependence on the short term call market was causing serious concern. It is also welcome in a broader sense as it calls upon the financial sector to prepare for unforeseen contingencies and strive towards a more prudential model of asset-liability management. Moreover, often times the stated monetary policy objectives need to be deftly balanced with one another. Thus, during the last year while domestic liquidity has remained comfortable allowing the large Government borrowing to go through without putting pressure on interest rates, the fact that credit demand was depressed probably helped. The need to urgently contain the fiscal deficit cannot be overemphasised, a point repeatedly made by the central bank in the past too as well as by the Finance Minister. Fiscal consolidation will release Government resources for the much-needed investment in physical and social infrastructure besides having a favourable impact on inflationary expectations in the economy and therefore on the interest rates.

The RBI sounds optimistic on the macro-economy during this year. A forecast GDP growth of 6 to 6.5 per cent against an estimated 5.4 per cent during 2001-02 is predicated on a substantial industrial recovery soon. Non-food credit is projected to increase by 15 to 15.5 per cent, substantially more than the 12.8 per cent registered last year. Inflation is expected to remain low at below 4 per cent. The external economy, despite certain adverse external developments, continued to be resilient and the RBI will no doubt pursue those policies which made it possible. During the last year, foreign exchange reserves rose by an unprecedented $11.8 billion. There are important measures to impart transparency in the financial sector so as to benefit customers. For example, banks have been asked to disclose all items of cost to their borrowers. It is in those details that the RBI breaks fresh ground.

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