A Wait-and-watch Approach To Major Policy Decisions

Updated: Nov 4 2003, 05:30am hrs
The Credit Policy at this time is a review of economic and monetary developments with policy measures being only a tool to address specific issues. This has been the pattern in the past where important rate changes have been invoked between policies as dictated by the situation. Therefore, there was little a priori justification for changes in the important benchmark interest rates in the system in the Policy. The Credit Policy announced by the RBI today has taken a wait and watch approach to major policy decisions, as there has been a change in the governorship. This is understandable since economic conditions have been favourable so far during the year.

A factor which has played an important role in this stance is inflation which though has been projected by the RBI to come down by the end of the year, presently does indicate negative real interest rate at the shorter end of the interest rate spectrum. This explains the neutral stance towards the bank rate and repo rate. Given abundant liquidity in the system, it is unlikely that interest rates would move upwards in the short-run.

The RBI has voiced concern about three issues which have been addressed in some detail. The first relates to the delivery of credit to the small scale industry, the second to the build up of unhedged forex positions by corporates as the rupee has been appreciating and the third to the shortfall in build-up of an investment fluctuation reserve by banks. They have been addressed by appropriate policy measures with more incentive being provided to foreign banks as well as banks lending to NBFCs for onward lending to the small-scale industry.

However, while the RBI has voiced some concern over some lending rates not coming down, the Policy as such does not provoke such a move through positive measures.