Preference For A Soft Interest Rate Regime

Updated: Nov 4 2003, 05:30am hrs
The Credit Policy statement largely fulfills the promise Dr YV Reddy had made earlier of a mix of continuity and change for his maiden Credit Policy. The intention is perhaps to consolidate the objectives of the earlier Policy and ensure that actual gains (such as the downward percolation of lower interest rates) are realised.

As expected, the Policy expresses RBIs preference for a soft interest rate regime although there are comparatively few measures enunciated towards this end. Dr Reddys concern about the overheating of the markets equity, foreign exchange, bonds, or otherwise is stamped all over his mid-term Policy.

An example is the requirement now for the mandatory hedging of foreign currency loans to corporates (barring exporters and for forex expenditure) for amounts above $10 million. This will reduce volatility in the forex markets, and protect corporates against significantly adverse market movements. It will also push up the forward premium for dollars, helping forward rates to settle at levels which are not only more realistic but also discouraging towards unwanted arbitrage.

So far, the benefit of softer interest rates has been confined to a handful of borrowers and sectors (well- performing PSUs, top-tier private-sector companies, housing, etc.) leaving the rest of the economy largely untouched. It is with the objective of correcting this anomaly that emphasis has been placed on a benchmark PLR.With full-scale economic revival in sight, the extension of the benefit of lower interest rates to all sectors is certainly an appropriate step to take.

Bhaskar Ghose, MD, IndusInd Bank