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P. Devarajan

ABOUT two months ago, top bankers talked of fresh capital investments coming back to life. The same gentlemen today have turned quiescent. They expect investors to call up after the Union Budget. In the current year, bankers could be looking at enlarging their loan portfolios, as their investment books may not bring in the profits from the markets as in the last three years.

"The good times are over," said a dealer. With the government having marked up fuel (petrol, diesel and coal) prices, inflation in the coming months could at least temporarily top 6 per cent before winding down if the spread of the monsoon is good. Most bankers do not see market interest rates going down in the current year; rather they expect a hardening. Some watch closely the Fed, though it is doubtful if a mark-up in US interest rates will have much of an impact on Indian markets.

"There is little of a connect between Indian and US rates," remarked a banker while there are others in foreign banks who lose sleep over Greenspan. Interest rates abroad have been moving up and if the current trend continues on the back of a pick-up in economic activity, Indian corporates may not waste time on visits abroad to raise funds.

Banks are not expected to raise lending rates or lower deposit rates any further. All of this could impact government borrowings, as the average cost last year was around 5.75 per cent. The actual net borrowings by the Central Government during 2003-04 were Rs 88,816 crore (gross Rs 147,636 crore). The State Governments' net borrowings were Rs 46,376 crore (gross Rs 50,521 crore).

The word from New Delhi is that the government may stick to the numbers of last year. The extant liquidity should see through any pick-up in economic activity, as there is a lag in utilisation of funds with the banks having the option of thinning their investments and placing the sales proceeds in the hands of investors.

Movements in the money market will depend on the dollar-imposed liquidity arising from FII and FDI inflows. One stable factor could be NRI deposits. Earlier expectations of strong FDI inflows now stand tempered with New Delhi not being able to make up its mind on foreign holdings in various sectors.

Two instances. Before the new government came to power, New Delhi capped foreign and Indian private holding in private banks at 74 per cent. Next came a second rule, which said foreign banks, in the event of building a majority stake in an Indian private bank, will have to wind up their foreign entity.

Initially, the government backed the idea of scrapping the 10 per cent cap on voting rights. Then, RBI said no.

Is it unfair to ask what is the government policy on financial sector reforms? There is nothing wrong in telling the world that foreign and Indian private investments are unwelcome in Indian banks rather than churning out circulars on the quiet in government presses.

The western countries do protect their banks from poaching. Indian banks only want freedom from the politicians and the banking department in the Finance Ministry, which has no earthly reason to exist.

The Manmohan Singh government has the option to recall the technically dead banking Bills placed for amendments in the last Lok Sabha, decide on the issue as they have to be CMP-compatible and get an okay from the Lok Sabha. That may not happen in the Budget session, going by the current indications. But it is time the Finance Ministry and RBI jointly made up their minds on banking reforms started way back by the Narasimham Committee.

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