Steady Reddy Ignites The Market

Updated: Nov 4 2003, 05:30am hrs
Crossing the 5000 mark within minutes of the publication of the Reserve Bank of Indias Mid-Term Review of Monetary and Credit Policy, the Sensex delivered a massive vote of confidence in the credibility of governor Yaga Venugopal Reddy, apart from signalling its confidence in the central banks assessment of medium-term economic prospects. By opting to stay the course set by his predecessor last April rather than go in for a mid-term shift in policy, Dr Reddy has signalled several things. First, and what the market took immediate note of, was his underscoring of a sense of confidence in the revival of growth underway. If Dr steady Reddy also thinks there is reason to feel good, the market seemed to be saying, then we better take note of this fact. By not resorting to rate cuts and not increasing liquidity flow at this stage, Dr Reddy has signalled that extant policy is well-thought out and capable of dealing with the emerging opportunities. However, in signalling continuity, Dr Reddy has also flagged change. His decision to resist market expectations on a bank rate, or at least a repo rate, cut shows that he is thinking through the logic of what has been done for a possible course correction later on. The governors decision to examine the relationship between key monetary policy instruments and the availability of liquidity shows a willingness to learn from the market and adapt policy to ground realities.

While fuelling the feel-good feeling, it should be noted, the RBI has expressed its concern about a slowdown in export growth, the inflationary potential in the economy, rising government debt and deficit and a lack of pro-activity on the part of banks in making credit available across the board. His initiatives in this regard will also be welcomed. Dr Reddys policy has also been welcomed because of the continued emphasis RBI is placing on corporate governance and transactions cost, even as it increases the freedom available to banks to manage their affairs in a market economy. The strong emphasis on regulatory challenges augurs well for improving RBIs credibility in this regard. The market should not, however, be too cocksure about central bank policy any longer. It should be noted that Dr Reddy did little to manage market expectations before coming forward with his mid-term review. He is likely to keep the market guessing as far as possible. Hence, a repo rate cut or an action aimed at altering the direction in the movement of the rupee can come at any time. Dr Reddys bias seems to be in favour of predictability in policy, but with the central bank retaining the initiative. By opting for continuity in rates, Dr Reddy has not robbed his policy of suspense since he can easily take rates further down or up depending on how market forces operate. A certain agnosticism informs his policy. Finally, the RBI has also hinted that there are limits to what monetary policy can do for the economy. Fiscal and tariff policy must step in where monetary policy cannot tread. Over to North Block.