To prevent any excessive speculation in the gilts market, the central bank has ruled out any further rate cuts in the current financial year. Industrial growth has undoubtedly improved, but sustainability of this growth in the midst of global stagnation, and lower domestic rural demand, needs to be watched. To that extent, a stronger interest-rate signal to banks may have helped. While more lending at sub-PLR is being witnessed at present, it must increase - real interest rates for the larger part of the economy remain on the higher side, especially because inflation is expected to remain benign.
The CRR cut is more in line with the stated intent to cut CRR to 3 per cent as per the statute of RBI while the cut in repo rate, a short-term liquidity management tool, was to align the rate with that on other instruments. The impact will be to increase banks capacity to lend, which will position the economy when a rebound encourages borrowers to borrow.
Governor Jalan has continued with his measures to improve market functioning and regulation. Most of the measures have been along the lines of the intent stated in earlier policies. The prominent positive measures include part-deregulation of pre-shipment and post-shipment export credit rates, guidelines for regional rural banks and urban co-operative banks, and deepening of the repo market.
Introduction of flexibility in deposit rates by encouraging banks to offer flexible-rate deposits should improve the monetary policy transmission mechanism. Banks have been given the freedom to decide the reset period on variable-rate deposits. The current weak transmission mechanism between the Bank Rate and the PLR of scheduled commercial banks stems from a pre-dominance of fixed-rate deposits with banks on the liability side as against variable rates on the asset side. The Governor has shown sensitivity to changing customer needs by complementing existing banking products with insurance services. This will not only benefit customers but also allow banks a new revenue stream and at the same time ensuring proper insurance advise and expertise is available within traditional banking channels.
Niall SK Booker, CEO Designate, HSBC India