India Inc seems to have lost out to their bankers as there has not been any change in existing interest rate

Renewed business confidence, euphoric stock markets, good monsoons and a stable political atmosphere is the environment in which Mr Jalan was required to conduct a mid term review of this year’s credit policy. Main priority for him thus was to further improve the euphoria in the environment, and try to aid in fuelling a higher level of economic growth.

However in this environment there are some trends which make his exercise not very easy, most important of them being increasing fiscal deficit, upward creeping inflation and a distinct slowdown in the deposit accretion in the banking system. Not a very easy job, I must say. Let us consider some of the main announcements of the policy.

The norms for banks for determining the housing finance allocation by banks are most welcome. This will not only further give a further boost to the housing sector which is already in the upswing but also have a pull through effect for some of the other industries like cement, steel etc. Such announ-cements are also required to facilitate the flow of capital in other infrastructure sectors.

Of the two most popular measures i.e. CRR and the Bank Rate, one has been reduced whereas the other has remain untouched. The reduction in CRR seems to have been influenced mainly by the Government’s insatiable for funds. Having already borrowed more than 100 per cent and 86 per cent of the net and gross budgeted borrowings in the first six months, the Government now needs to borrow more to carry over the latter six months. Today we are in a situation wherein there is sufficient liquidity in the system. Broad money supply (M3) growth at about 16-17 per cent continues to be above the targeted 15.5%. On the interest rate front corporate India seems to have lost out to their bankers as there has been no change to the existing rate. In an environment where bankers are finding it very difficult to maintain a balance between profitability and risk, a further drop in the bank rate without a corresponding decrease in the deposit rate of small savings such as PPF etc would have further aggravated their problems. Probably Jalan thought that a cut in the interest rates would be more meaningful when the fiscal deficit is under control, for then it would really benefit the industrial sector. Permission to undertake Forward Rate Agreements/Interest Rate Swaps would assists the mutual funds in more effectively hedging their interest rate risks.

What is however urgently required is to develop and strengthen the debt markets in India. We are now standing on the verge of the insurance sector being open to private competition.

This coupled with increased activity in the mutual fund industry should enliven the almost non existent debt market and induce greater liquidity into it .

While some steps are taken by the Governor to further introduce tighter prudential norms, the Government needs to take certain hard decisions so that public money doesn’t have to be continuously spent for the survival of the banks.