Date:27/10/2004 URL: http://www.thehindubusinessline.com/2004/10/27/stories/2004102700571000.htm

Back A bleak script

PUTTING BEHIND THE salad predictions of May, the Reserve Bank of India on Tuesday came up with a bleak script for the Indian economy. The RBI Governor, Dr Yaga Venugopal Reddy, has marked down the pace of GDP growth for 2004-05 to 6-6.5 per cent from 6.5-7 per cent, upped the price trend to around 6.5 per cent against the earlier 5 per cent, and warned of interest rates occupying the upper end of the graph in the coming months by lifting the repo rate 25 basis points to 4.75 per cent. Not surprisingly, higher crude prices and poor farm growth, which may not even touch 3 per cent, have been blamed.

Inrecent times the repo rate (the price the RBI pays on bank funds parked with it in exchange of securities) has signalled the Monetary Policy stance, with the Bank Rate, left unchanged at 6 per cent, offering a medium-term perspective. A higher repo is expected to avert money chasing goods at a pace that brings pressure on prices. Will the repo and the cash reserve ratio be nudged up if prices breach estimates? Till October 21, loose cash absorbed under the Market Stabilisation Scheme (MSS) stood at Rs 54,146 crore, while funds offered under repo dipped from an average of Rs 70,523 crore in April to Rs 13,805 crore in October. Add on the surplus balances of the Centre with the RBI, and for Dr Reddy "the overhang of liquidity continues to remain substantial." That is possible, also as a part of the funds locked in the MSS will seep into the system as and when government paper held by banks get redeemed. The call rate could tail the revised repo rate and market yields will move forward making government borrowings less cheap. As of October 21, the Centre had completed net market borrowings of Rs 26,233 crore (29 per cent of the budgeted amount) and gross market borrowings of Rs 75,044 crore (49.8 per cent); in the coming months New Delhi could make more visits to the market when banks are opting to service a smart rise in credit needs of the industry.

Corporates could lay their hands on credit lines with banks, leading perhaps to a scramble by early 2005. Banks are unlikely to be tempted to raise lending rates as the median lending rates on demand and term loans of public sector banks are ruling in the 10.50-12.75 per cent range. Credit consumption is brisk though the RBI sees an inconsistency in its quality. Housing and retail sector have tucked away funds while the RBI has increased the risk weight from 50 per cent to 75 per cent for housing loans and from 100 per cent to 125 per cent for consumer credit to avert asset bubbles. From the Mid-Term Review of Annual Policy Statement for 2004-05, it looks the economy may not have the comfort of steep dollar inflows which kept money cheap the last three years; that is evident in the RBI raising the ceiling on interest rates on NRE deposits. With New Delhi fumbling on the clearing the way for foreign direct investments, the RBI has to perforce walk a blind alley.