The Hindu Business Line : Will hint of a hike help?

Macroeconomic inflation and a overheated retail credit market, especially the mortgage segment, were the two well-identified, indeed well-articulated, concerns of the RBI as it went into its review of the Credit Policy.

The backdrop to this policy was, of course, the FOCM inaction on the interest rate front, followed by most other central monetary authorities.

The policy action that has emerged does not address these issues, either directly or decisively. The system is no better off by the hint of hike and the threat of a tightening.

Ideally, in the given situation, one would have liked to see a continuance of the overall favourable liquidity conditions, with some changes in the distribution across the money market and asset classes. The way it has been handled, the result may be exactly the opposite.

One set of measure that would have delivered on the objective would have been to initiate the long-awaited debt market reforms.

In that case, what would have happened is that banks stuck with a huge corporate bond portfolio in an illiquid market would have, in an improved liquidity situation, exited and financed some part of their growing advances through this route. Credit derivatives would have substituted credit growth without changing the overall rate of growth and thus made it less risky.

The need has been to create a situation where more liquidity will not flow to those segments of the financial and non-financial markets, which have been soaking it in over the past few months; be it the equity market or the real-estate market.

Any generic solution such as a standalone part hike in the interest rates will, if anything, compound the specific problem in the debt market in absolute as well as relative terms. Also, it will have no major impact on credit growth to the overheated segments.

In essence, what the system requires is not a directional change — from high to tighter liquidity, or from less expensive to more expensive credit.

Instead, the need is for allocative changes, possible through sectoral measures. This would not have impaired growth, but would have changed the composition of credit.

Why, for instance, can the RBI not reduce the SLR from 25 per cent to 20 per cent in a staggered manner?

This will alter the relative price-yield equation in the SLR and the non-SLR markets and make the latter more liquid. As things stand, this will necessitate a change in the Banking Regulation Act and the blip in liquidity conditions is hardly justification enough for such a step.

(The author is Chairman and CEO, J&K Bank.)

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