The reduction in credit slowed down to 24% compared to 31% a year ago, in the previous quarter. The policy does not seem to have taken a serious note of that.
This is further aggravated by the deposits which grew at the rate of 24.4% compared to 21% last year. The RBI has, however, recognised that while the non-food credit growth has decelerated, the acceleration in money supply and reserve money would therefore warrant appropriate measures.
There is a recognition thereby, of the overheating of the economy in some parts and therefore the policy seems to be aiming at a decelerated but quality growth in credit. This is also corroborated in some form in the fact that the GDP growth projections for 2007-08 are retained at around 8.5%. There were expectations in banking circles on the policy addressing the aspect of the quality of the credit. A fresh look at the risk weightages was expected. Real estate financing in particular was expecting some directional changes in the policy stance. The policy however has vaguely touched upon its emphasis on credit quality and orderly conditions in financial markets for securing macro economic and in particular financial stability, while simultaneously pursuing greater penetration and financial inclusion.
To summarise, the first quarter review on monetary policy has kept the overall rate structure unchanged. However, several measures could be expected during the quarter itself. As we see the volatility in the money market as well as a rise in the global fuel and other prices, it is bound to have an impact on the rate structure and the quality of the credit of the banking system.
?The author is National leader, global financial services, E&Y