P. S. Shenoy

THE Mid-Term Review of Annual Policy Statement of the Reserve Bank of India (RBI) for the year 2004-05 reflects the central monetary authority's renewed thrust on economic growth without compromising the goal of price stability.

To keep the promise of maintaining a growth-conducive environment, it has neither raised the Bank Rate nor hiked the CRR beyond its current level of 5 per cent. However, there is a marginal increase in the fixed repo rate by 25 basis points to 4.75 per cent to stabilise inflationary expectations. In view of the persisting uncertainties on the global oil situation and a partial slowdown in agriculture, the RBI has revised downwards its GDP projection to 6-6.5 per cent and increased upwards its inflation projection (on a point-to-point basis) to 6.5 per cent.

However, it must be noted that the growth of 6-6.5 per cent in real GDP is still a robust growth rate for an emerging economy like India. The Policy has announced a number of significant measures for the banking sector that would go a long way in promoting its stability.

Such measures as preparation of guidelines for implementation of BASEL II, the preparation of guidelines on "ownership and governance", and the promise to bring down the CRR to internationally accepted level of 3 per cent in the medium term would speed up the process of globalisation of the banking industry.

The policy also provides greater flexibility to banks in various areas of operations. The increase in ceiling on NRE deposit rates to "Libor plus 50 basis points" and the reduction in tenor of retail domestic deposits from 15 days to seven days are favourable developments.

The minimum maturity period of commercial paper (CP) has been reduced to seven days.

This measure will help corporates and banks to manage their funds more efficiently and will add further momentum to the CP market.

There was market demand to rationalise the processing, settlement and documentation of CP issues. The setting up of a Group to go into these aspects would meet the long-standing demand in this area.

The RBI has reduced the ceiling on borrowings from the inter-bank market in respect of non-banking entities and thus strengthened the process of creating a pure inter-bank market.

The liberalisation of forward-booking contracts up to 100 per cent without documentary evidence would add volumes to the forex market and help corporates to undertake better risk management in this area. The Policy appropriately cautions the market participants to prepare for uncertainties while reiterating the RBI's intention to pursue stability.

(The author is Chairman and Managing Director, Bank of Baroda.)

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