Do Not Be Complacent!

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: Reserve Bank of India governor YV Reddy has announced a good annual policy. It is in tandem with expectations as none of the market participants were expecting any major announcement. However, through the policy, the RBI governor has sent an important signal to bankers; do not become complacent!

There are two major issues that get highlighted in the policy announcement.

One, Dr Reddy urged bankers to make provisions for unforeseen contingencies and keep updating business policies to tackle the continuing changes in the external environment.

Another issue is the interest rate movement. Though there have been signs of an uptick in global interest rates, the RBI took a positive stance maintaining a status quo.

This would give a strong signal that RBI wants soft rates and would help credit growth.

Going by the current trend, any movement in the interest rates is unlikely in the near future. Particularly, with around Rs 75,000 crore liquidity in the inter-bank system, no rise in interest rate is seen in the near term.

But, if credit picks up — and there are signs of an encouraging credit offtake — the interest rate will go up in the long run. In the light of this, the RBI direction to build up an IFR of 10 per cent — though this is left to individual banks — is a step in the right direction.

The RBI has extended flexibility to banks on their loan policies and has withdrawn the limit on their unsecured exposures and allowed banks’ boards to fix their own policy on unsecured exposures after 37 years.

This is a welcome move on the part of RBI.

Overall, given the current external and internal economic trend and the post-election phase, I would say that Dr Reddy has produces a positive policy statement.