The mid-term review of the Monetary and Credit Policy for 2003-04 comes in the midst of improving economic data and optimism. GDP expectations have been upped to 6.5-7 per cent by RBI from the 6 per cent estimated in April. Inflation has been broadly within the 5-5.5 per cent range mentioned in April, averaging 5.2 per cent in the first half of the fiscal. RBI expects this to soften to 4-4.5 per cent by the end of the fiscal, with a possible downward bias. Record forex inflows and robust exchange reserves have also been noted. The overall stance of the Monetary Policy announced in April has been maintained. With consensus expectations of a bank rate cut not materialising, yields at the 10-15 year segment are up 5-10 basis points. However, I expect yields to resume their downward path towards 5 per cent, on easy liquidity conditions.
Pursuing the objective of phasing out non-bank participants from the call money market, RBI has lowered their lending limit to 60 per cent (earlier 75 per cent) of average lending in call/ notice money market during 2000-01. The biggest impact of the lending restriction will be on liquid schemes of mutual funds which have grown exponentially in the last three years. This has led to repo lending by these entities below the prevailing call money rates. This situation will likely continue as long as there is substantial excess liquidity in the system. The concerns over the unhedged foreign currency borrowings of corporates , has prompted RBI to instruct banks to ensure that their clients hedge foreign currency loans exceeding $10 million.
VISHWAVIR AHUJA, MD, Bank of America