Opinion - Editorials

A vote for continuity

THE RBI GOVERNOR, Y.V. Reddy's first review of the annual monetary and credit policy was widely expected to emphasise continuity, in both style and substance. The expectation has not been belied. Under his predecessor, Bimal Jalan, the policy statements were sought to be converted into "non-events": headline grabbing announcements of a bank rate cut or a reduction in the cash reserve ratio (CRR) were, more often than not, taken out of the policy statements. This time too, the Governor has not altered either the bank rate or the CRR. They remain at 6 per cent and 4.5 per cent respectively. The emphasis, throughout the review, is on continuance of measures already taken with an accent on implementation. The already well-articulated stance of the monetary policy remains the same: provision of adequate liquidity to meet credit growth and support for investment demand with a vigil on the price level. Within those broad and sometimes contradictory goals, the RBI has once again emphasised its preference for softer and flexible interest rates.

The RBI finds vindication of its monetary stance in the increasingly favourable macroeconomic numbers. Since April, when the Annual Monetary Policy statement was presented, the economic outlook has been upbeat, buoyed by good monsoons and satisfactory export performance. The forecast for the world economy is better. The outlook for domestic inflation is more benign (although there cannot be any lowering of guard on the price front). Expansion in money supply has been on projected lines. Domestic credit offtake has been showing signs of a pick-up. Capital flows have buoyed the external sector while the current account has recently turned to deficit, indicating a revival in import-led growth. Financial markets, especially forex, have remained stable. Such optimism permeates the central bank's widely watched forecast of GDP growth. For the current year (2003-04), the RBI expects an overall growth of close to 7 per cent, up from the 6 per cent forecast made in April and considerably more than last year's 4.4 per cent.

The central bank will also persist with its policy of broadening the consultative process. Demystification of arcane monetary strategies, a prime objective of the Jalan era, will also be continued. It simultaneously enhances the level of understanding and facilitates greater participation by the society at large. A major policy success is seen in the remarkable spurt in retail credit, especially to the housing sector. Housing loans are now eminently affordable to many sections of society. However, not all have benefited from the general decline in the interest rates. Banks' prime lending rates continue to be sticky. Top corporates are able to access funds at below the prime rates but other sections, the small and medium enterprises, infrastructure and agriculture, have not shared the benefits of a falling interest rate regime. The RBI has once again stressed the need to improve the institutional mechanism to strengthen credit delivery systems. The quality of customer service by banks will have to improve. On the surging forex reserves, the RBI has reiterated that they are compatible and consistent with the rate of growth of the economy, the share of the external sector and the size of the risk-adjusted capital flows. Those observations are not original but are entirely consistent with the policy of continuity. The need for fiscal consolidation by the Centre and the States has been emphasised yet again. As the Governor stated it succinctly, the monetary policy in its present form has served the country well. There is no special reason for the RBI to make sensational announcements for their own sake. Or to desist from its plodding analyses of macroeconomic issues.

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