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Romesh Sobti

Given India's growing role in financial markets, a more comprehensive package of measures would have been welcome.

The decision in the Credit Policy Review to hike the repo rate is clearly aimed curbing inflation in an environment where domestic growth impulses are strong. The tone of the policy is appropriately hawkish.

High asset prices and overheating in credit markets, particularly the mortgage market, also figured in the list of key risks that the policy emphasised. With the hike in this policy rate, the cost of funding for banks is likely to go up and this may nudge bank lending rates further up. The fact that the reverse-repo rate has been left untouched will allow a freer play of rates at the short end of the yield curve.

Domestic priorities

The decision to hike the rate, therefore, suggests that domestic factors driving inflation and credit growth, rather than international developments, are on top of the RBI's list of concerns. However, the policy statement makes it clear that the next trigger for further monetary tightening could stem from international factors such as an up-tick in commodity prices.

The policy has its share of structural and institutional initiatives. But the fine-print holds some severe disappointments for banks and other segments of the economy. The apparently enhanced limits for overseas borrowings by banks is a case in point.

While the limit for overseas borrowings has been raised to 50 per cent of Tier-I capital, export credit has been included in the overall overseas borrowing limit of 50 per cent of Tier-I capital. Earlier, 100 per cent of export credit was eligible for foreign currency refinance. This could severely impair the export finance operations of banks and cascade down to the exporter community, which could face a shortage of credit and higher borrowing costs.

A number of other measures draw on the recent report on capital account convertibility. While these are moves in the right direction, they are unlikely to have an immediate impact on portfolio holdings of Indian households.

The central bank has continued with its gradualist approach towards opening up capital flows. Given the changing global context and India's growing role in financial markets, a less conservative and more comprehensive package of measures would have been welcome.

(The author is Executive Vice-President and Country Executive, India, and Head, Sub-Continent, UAE ABN AMRO Bank NV.)

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