The RBI seems to be well convinced and rightly so, with the fact that the reason for all the stability and robust growth in the economy was due to a soft interest rate regime. In a very clear and explicit tone, it has said that maintaining adequate liquidity and a soft interest rate environment is its objective and there is no looking back.
Simultaneously, it has also cautioned that the inflation factor is not to be taken lightly, it would closely monitor price behaviour and there is no room for complacency. Which means that the RBI could temporarily reverse its policy directions for the short term, if needed.
The credit policy has stressed the fact that the economy is on a growth path with GDP growth estimates being revised upwards to 6.5-7 per cent with an upward bias. It expects inflation to remain benign at around 4-4.5 per cent. Keeping these two factors in mind and that there is adequate liquidity in the market as also that forex inflows remain robust, the RBI has decided to maintain the Repo rate, Bank Rate and CRR at current levels.
The governor has advised banks to lower their PLRs and take steps to improve the credit growth in the economy, like setting up an advisory committee/working group to undertake comprehensive review and suggest ways to improve credit flow to agriculture and small scale sectors.
He also said that soft interest rates have not benefited the manufacturing sector as much as the housing sector. The simplified procedure towards providing a single window clearance, with a general permission from RBI for Sebi approved Offshore Schemes of Asset Management Companies (AMCs) is a welcome move. u
The credit policy will be negative for the bond/debt markets in the short term, as the RBI did not cut any of the rates, as expected by the market. However, we think that if inflation numbers pan out as expected ie below 4 per cent, then the RBI can look at reducing the Bank rate and possibly the Repo rate too, sometime in January 2004. The RBI has indicated that it will not wait till the next credit policy to make any required changes to either rates. It looks like; there could be frequent modifications to the monetary policy measures, if present market conditions change.
Overall, we think that the RBI has maintained their stance on soft interest rate policy, which will further boost economic growth. The initial reaction and disappointment shown by the debt market will subside and in the medium to long term it will be good for debt as well as for equity markets.
The author is CIO, UTI MF