The Hindu Business Line : Continuity and change

The Credit Policy Review is welcome as it effectively addresses the concerns of price stability, credit expansion and financial stability. Against the backdrop of buoyant industrial growth, surge in bank credit, trade deficit and inflationary pressures, the RBI raised the repo rate by 25 basis points to 7.25 per cent. This rise is also a move to moderate credit deployment in sensitive sectors such as real estate, which have shown growth of over 100 per cent.

Healthy signal

The increase in repo rate without touching the reverse repo rate is a signal to manage the resources effectively without resorting to lending through borrowings instead of deposit mobilisation.

The increase in repo rate has to be seen in the background of over 30 per cent credit growth in three consecutive years, incremental CD ratio of 95 per cent followed by 100 per cent increase last year and the excess SLR securities held by the banks not being an inexhaustible resource taking into account its gradual dip.

While the increase in repo rate is expected to tide over short-term interest rate volatility and inflationary pressures, the unchanged reverse repo indicates marginal increase in short-term interest rates. In the medium-term, the interest rates appear stable at the current level.

Raising the FII investment limit in Government Securities market may provide more liquidity and depth to the market and enhance the price discovery. The increased access to External Commercial Borrowings will greatly enhance liquidity. The new policy initiatives towards ushering in fuller capital convertibility, is a step in the right direction. The increased business under-remittances will help banks improve their fee-based income.

Prudent management needed

Liberalisation in borrowing from overseas branches and correspondent banks will improve banks' liquidity and help in maintaining effective ALM.

In a contextually significant move, the Governor suggests the need for prudent and judicious resource management. This is important because as the conventional wisdom suggests, "stitch the coat according to the cloth".

The policy changes would foster a GDP growth of above 8 per cent, led by buoyancy in manufacturing and services sector. It also facilitates adequate liquidity to meet the credit demands of the productive sectors. The RBI's intention to contain annual inflation at 5-5.5 per cent, notwithstanding the liquidity issues and volatile crude oil prices, suggests a distinct possibility of periodic policy interventions.

Implementation of the provisions in the notification on the Micro, Small and Medium Enterprises Development Act will bring in greater transparency in the priority sector norms.

Extension of Basel II deadline provides an opportunity for banks to enhance their preparedness in meeting global benchmarks. Otherwise, leveraging optimal capital under standardised approach may not be fully possible resulting in higher capital requirement (Unrated entities attract 100 per cent risk weight). However, for majors such as Canara Bank, the extended deadline will help streamline the comprehensive architecture, especially relating to operational risk.

(The author is CMD, Canara Bank.)

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