Sending Right Signals

Updated: Oct 30 2002, 05:30am hrs
The statement presented by the Governor of RBI this time is important because the policy transcends the conventional role of a review and combines content with pertinent policy measures that should positively impact the system. This is understandable, as prevalent conditions are uncertain. The monetary authority has been quite forthright in admitting that overall economic conditions have not turned out to be as rosy as were projected at the beginning of the year, and that the economy is in for an overall lower economic growth performance. The RBI certainly deserves to be commended as it has taken the right steps in tackling the problems that are confronting the economy.

Ym Deosthalee,
Director & CFO L&T
The economy is expected to grow at a lower rate of 5-5.5 per cent this year mainly on account of the drought. However, industrial growth is looking up as seen in its performance in the first five months of the current fiscal.

There are indications that industry will turnaround this year, which will necessitate support from the financial system. Monetary policy can help in this process on the supply side by making provisions for adequate liquidity as well as ensuring a softer interest rate regime.

The RBI has reiterated that these two goals have been the prime drivers of its monetary policy in the past. Hence, the cut in the CRR and bank rate are measures that have been announced to provide the necessary level of comfort to the economy even though the 25 bps reduction is not too significant in itself. This will placate sentiment as market players were hoping for such changes to materialise in this policy. Hence, these changes should be viewed more as attempts to improve sentiment and provide the right platform to keep industrial growth buoyant, especially in a drought year.

The RBI has also pointed out that banks need to align their lending spreads above the PLR to ensure a more transparent system. Industry can hence, now look forward to receiving funds from banks at more reasonable interest rates.

The policy has also extended the facility of export credit at the PLR minus 2.5 per cent from September 2002 to April 2003. This is a good move as it comes at a time when Indian exports have showed a smart increase in not too favourable global circumstances.