Thus, RBI has introduced measures, both to restrict liquidity as also to raise the cost of resources. The reduction in rates of non-resident deposits, both of NRE and FCNR would reduce their attractiveness and this foreign source of banking sector liquidity may become constrained. A severe cut in maximum loan amount against such deposits is also a step in this direction. Though, the measure has been taken by the RBI to curtail general liquidity, it will also affect genuine long-term NRI savers.

The increase in repo rate and widening of the LAF band to 1.50% on the one hand signifies higher cost of money for lending and on the other may increase volatility. Reverse repo rate and bank rate have been kept constant. RBI wanted to take cogent action and refrain from mere symbolism.

In addition to the measures for general credit curtailment as above, RBI has also introduced measures for selective control in areas of higher concern. As generally happens in boom phases, particularly where the allocative capability of the banking sector is not finely horned or matured enough, lot of money flows into non-productive sectors like real estate, capital markets, etc. This leads to pre-emption of resources meant for productive sectors on the one hand and creation of asset bubbles on the other which could burst causing lot of pain and culminate in long-drawn recessionary phase. This has been the experience in Japan, South-East Asia, etc. RBI, both as a banking regulator and purveyor of Monetary Policy, wants to protect the system against such an outcome. RBI has, therefore, selectively introduced measures to restrict credit to such segments. The increased provisioning requirements for such segments would, however hurt the banks badly at the fag end of the year. If at all, such increase should have been for fresh loans to deter banks from increasing such exposures, which is RBI’s intent. Overall, the measures signal higher rates in the economy and tighter liquidity.

Hopefully, it should make the banks rebalance their portfolios and take a harder look at their asset liability management in particular the profile and pricing, so as to reflect correctly the risk while being able to ensure adequate credit of the productive sectors.