Toeing the Reddy line

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During his five-year stint as Reserve Bank of India (RBI) governor, Yaga Venugopal Reddy has announced several frontal attacks on inflation as part of his credit policy pronouncements. But his latest one, on July 29, was by far the toughest one for the banking industry.

This time, while hiking the cash reserve ratio by (CRR ) by 25 basis points and the repo rate by 50 basis points, he was firm that the banks have to fall in line in bringing their business targets within the RBI’s target to drastically reduce the double-digit inflation number.

While the policy actions would aim to bring down the current “intolerable” level of inflation to a tolerable level of below 5% as soon as possible and around 3% over the medium-term, at this juncture a realistic policy endeavour would be to bring down inflation from the current level of about 11-12% to a level close to 7% by March 31, 2009, he said.

“While there are early signs of some moderation in money supply and deposit growth, they continue to expand above the indicative projections, warranting continuous vigilance and appropriate and timely policy responses,” explained Reddy.

Reddy’s cautioning that the evolving environment of heightened uncertainty in global markets (over which RBI has no control) and the dangers of potential spillovers to domestic markets were interpreted by bankers as an indication that more stringent monetary measures may be forthcoming from the central bank.

The RBI’s wish-list for banks had many items:

It is necessary to moderate monetary expansion and plan for a rate of money supply growth in the range of around 17% in 2008-09 in consonance with the outlook on growth and inflation so as to ensure macroeconomic and financial stability in the period ahead, said RBI on its target for banks.

Moreover, consistent with the projection of money supply, the growth in aggregate deposits in 2008-09 is now placed at around 17.5% or around Rs 6,00,000 crore. The growth of non-food credit, including investments in bonds/debentures/shares of public sector undertakings and private corporate sector and CP, is placed at around 20% in 2008-09