The credit policy statement has been more of a review of the monetary developments of the first half of the year. The stance of monetary policy for the second half of the year is clearly noncommittal at this stage and would probably respond to developments as and when necessary. The focus of the Credit Policy has been to strengthen the prudential guidelines for banks and financial institutions and move forwards greater transparency and full disclosures in banking operations.A subtle note of caution from the Reserve Bank of India.
The Credit Policy does sound sufficient note of caution to the central government of several internal issues. It is very evident from the policy statement that RBI is seriously concerned about the rising fiscal deficit of the government. A rise in fiscal deficit during the current year or the next financial year could put severe upward pressure on domestic interest rates. Besides raising interest rates, high deficits would reduce the amount of lendable resources of the bankingsector as more bank funds will need to flow sin government securities. The Governor has rightly assigned "high national priority" for reduction of fiscal deficit over the next 2-3 years.
The rate of Money Supply growth, at 20.6%, is significantly above the targeted rate of 15% to 15.5% and is not sustainable at these levels given the expected growth of the real sector. The more worrying factor is that most of the monetary expansion is a result of bank's credit to the government sector. Rapid expansion in Reserve Money is another cause for serious concern. Reserve Money has increased by Rs 11,010 crore in the current year compared to drop of Rs 8,947 crore in the same period last year. Even worse, most of the increase in Reserve Money this year has been contributed by net increase in RBI credit to central government.
Wholesale price inflation has averaged 7.21% in the first half against the desirable range of 5% to 6% set for the entire year in the April Credit Policy. While this seems difficult toachieve, there could be further inflationary pressures if Money Supply growth is not controlled.
The above factors viz. concerns on the fiscal front, rising money supply growth, excess reserve money creation and buildup of inflationary pressures coupled with externals market turbulence make a strong case for tightening of RBI's monetary stance. However, considering the continuing industrial slowdown and sin hope of an improvement in industrial activity, the Reserve Bank has probably decided to take the "middle path" for the time being. Such a stance, however, carries the risk of inflation being stoked further by monetary expansion and interest rates which have remained largely stable despite the steady rise in inflation could see a sharp spike to catch up with the latter.
Significant Policy measures
Implementation of Narsimhan Committee Recommendations
Capital adequacy ratio increased from 8% to 9% with effect from March 31, 2000. Income recognition and provisioning norms ongovernment guaranteed advances being brought at par with sother advances with effect from year 2000-01. Time frame for categorising an advance as doubtful debt shortened from 24 months to 18 months. The same would be effective in phases over the period 2000-02. Government securities to carry a risk weight of 2.5% effective March 31, 2000. An additional 2.5% would need to be provided for at a later date. Investment by banks in bonds and debentures of a corporate guaranteed by a Public Financial Institution (PFI) to be treated as an exposure by banks on the PFI. Banks to put in place Asset Liability management systems by March 31, 1999. All open foreign exchange positions to carry 100% risk weight from end March 1999.Measures concerning money markets.
Restriction on minimum period of Repo removed, overnight repos allowed. RBI top promote activity in interest rate swaps market by providing standardised documentation. Access to call money markets, over aperiod of time, will be restricted to banks and primary dealers.Measures concerning government securities and treasury bill markets.
Public Debt Act, 1944 to be replaced by Government securities act. Securities Contracts (Regulation) Act, 1956 to be amended. The changes will pave for the development of a "when issued" market and increased activity in repo market. Introduction of uniform price auction for 91 day treasury bills.Apart from the measures mentioned above, the Reserve Bank has taken steps to improve the operational efficiency of trading and settlement systems. The setting up of a VSAT network is expected to provide the backbone for moving towards a RealTime Gross Settlement (RTGS) system in line with international practices.
The author heads the market research division of JP Morgan
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
Printer-friendly page
