Focus On Continuity

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: The policy statement presented by the governor on Tuesday has maintained a fine balance between the underlying strengths of the economy and the reality of possible adverse developments in the external sector.

Governor Reddy has indicated the need for continuous monitoring of the local and international business environment and indicated that if conditions change it would be appropriate to take monetary measures, which may not be in line with the present easy conditions.

Value of the rupee, its appreciation and availability of funds at internationally benchmarked rates were the key watch points in Tuesday’s policy. The policy comes at a time when the interest rates in international markets are likely to firm up and oil prices are reaching historic highs.

The emerging situation in Delhi would also have influenced his decision to adopt an approach of continuity with the scope for change. The Governor has left key interest rates (the bank rate, cash-reserve ratio (CRR) and repo rate) unchanged in view of the liquidity in the financial markets.

The overall stance of this monetary policy is to provide liquidity to meet credit growth, support investment and export demand. It pursues an interest rate environment that is conducive to maintaining growth and price stability.

On the exchange front, it was reiterated that the policy will continue with its flexible approach without a fixed target rate or a pre-announced band. RBI demonstrated this flexible approach on Monday when it intervened in the market to stabilise the rupee on the back of the stock market crisis. The policy also focuses on structural matters related to strengthening the financial system and emphasising the need for a consultative approach to achieve social good. Announce-ments in the policy for broadening the definition of infrastructure to include agro-processing and storage of agricultural produce, changes to the NPA norms for lending to the agriculture sector will increase the availability of credit to this sector. The changed NPA norms take into account the seasonality of flow of this sector and will help banks look favourably at this sector.

Securitised agri-loans will be classified as lending to agriculture under priority sector lending. This will allow banks to take exposures to this sector where they do not have the necessary infrastructure for direct lending.