Financial Daily from THE HINDU group of publications
Friday, Apr 29, 2005
Money & Banking - Insight
Reflects buoyancy in economy
K. Cherian Varghese
CONDITIONS of stability in the fiscal system help sustain the momentum of growth in the economy. The Monetary Policy Statement not only tries to promote stability but also provides an impetus to corporates to make their presence felt globally.
The momentum in the economy with a GDP growth of 6.9 per cent is better than expected. The capital goods sector registered encouraging growth.
It is heartening to note that there was sustained increase in import of capital goods. This points not only to build-up of substantial additional capacity but also to modernisation of industry to face global competition.
Credit growth has been robust with an incremental credit-deposit ratio of more than 100 per cent. This should be viewed against the funding available by way of increased external commercial borrowings and trade credits used by industry.
Against this background, it was necessary to maintain stable conditions in interest rate regime to support the sustained growth of the economy. Bank rate and repo rate the rate of interest charged by Reserve Bank of India while lending to commercial banks against Government securities have been left untouched at 6 per cent.
The only change is in the reverse repo rate the rate of interest paid by Reserve Bank of India for short-term funds kept by the banking system with them. The reverse repo rate has been increased by 25 basis points to 5 per cent so that even in conditions of excess liquidity, banks offer fair returns to their depositors. The cash reserve ratio (CRR) has also been left untouched at 5 per cent to ensure that liquidity is not affected in the context of the growing demand for credit.
Banks need to raise deposits as they have not only to fund the increasing demand for credit but also keep in view the Government's market borrowings programme. Restoration of tax exemption of Rs 12,000 for bank interest or including bank deposits in the permitted investment of Rs 1 lakh for tax exemption may remove the disincentive for depositors.
The ceiling limit for investment in overseas ventures by Indian corporates has been raised from 100 per cent of their net worth to 200 per cent under the automatic route. This may see many more Indian multinationals emerging.
The Policy sounds a positive note about buoyancy in the economy and the ability of the banking system to support the growth momentum.
(The author is Chairman and Managing Director, Union Bank of India, Mumbai.)
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