The Policy Is A Status Report

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: The Reserve Bank of India’s (RBI) annual policy statement for the fiscal 2004-05 is basically a status report about what all has happened in the Indian economy during the last fiscal.

We think the policy would be reviewed in a month’s time after the final budget is presented by the new government at the Centre.

RBI has also kept the Bank Rate and the cash reserve ratio (CAR) unchanged at the current levels of six per cent and 4.5 per cent. Although it was warranted by the current liquidity situation, this may be reviewed.

The inflation target of five per cent and real gross domestic product (GDP) growth of 6.5-7 per cent during the fiscal 2004-05 appear reasonable.

RBI’s move to extend further flexibility to banks on their loan policies is a step in the right direction. It has withdrawn the limit on banks’ unsecured exposures and allowed banks’ boards to fix their own policy on unsecured exposures.

However, banks would be required to make an additional provision.

RBI has allowed banks to raise long-term bonds for financing infrastructure projects.

The move will boost infrastructure lending and also take care of the asset liabilities mismatch of banks arising out of financing such projects with long gestation period with relatively short-term liabilities.

The move may not benefit private sector banks much as their exposure to infrastructure financing is not significant.

But the move will certainly help large banks with exposure to infrastructure projects.

The move to align the pricing of bank credit to the assessment of credit risk with an aim to improve credit delivery and credit culture is also a right move.

This is based on the reality of changing market dynamics by taking into account shifts in the market place i.e., from sellers market to buyers market.