We believe that the basic premise of mid-year credit policy is sustenance of industrial recovery and robust export performance. RBIs strong argument in favour of higher forex reserve build up indicates that it will continue to support domestic liquidity to keep the interest rates conducive for translating the industrial recovery underway into a stronger momentum. Essentially, the salient points of the policy remain the same as before. But there is an indication of continuing vigil on the inflation level while reiterating the soft interest rate bias; which possibly reflect the bias for stability.
The policy provides for greater flexibility in interest rate structure in the medium term, which hints at the need for rationalization of lending rates.
While acknowledging the risk to growth from a weak agriculture, RBI is optimistic over the industrial recovery, which is backed by strong export and core sector performance. Impending threats to demand for manufacturing sector has prompted RBI to downsize GDP estimate to 5-5.50 per cent range compared to its earlier expectation of 6-6.50 per cent. The central bank has drawn satisfaction from the discernible improvement in credit off-take from the banking sector. We believe that the RBIs move on repos rate and cash reserve ratio indicates that central bank will continue to play the liquidity levers.
RBI has debated the costs and benefits of maintaining high forex reserves and seems to be convinced that the possible economic cost of holding high reserves will be much smaller than the risks from sharp exchange rate movements.
The increase in reserves largely reflects higher remittance and quicker repatriation of export proceeds and non-debt inflows.
Greater push towards money market has helped the development of the repos market. Collateralised borrowing and lending obligation (CBLO), a money market instrument offered by the Clearing Corporation of India Ltd (CCIL) is set to take off, with RBI to come out with operating instructions soon.
P Krishnamurthy vice chairman, JM Morgan Stanley