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K. V. Kamath

The RBI has reiterated the strong growth momentum in the economy and the robust growth prospects across both the services and industrial sectors.

The policy statement marks another step in the opening of the Indian market to foreign capital inflows. The enhanced limit for overseas bank borrowings as well as foreign institutional investor investments in government securities are welcome measures that will give banks greater flexibility in managing their balance sheets, and supplement domestic savings in meeting the economy's overall liquidity requirements.

Watchful stance

At the same time, the RBI continues to emphasise the need to be aware of the potential risks in an environment of rapid growth. The hike in the repo rate is indicative of the central bank's readiness to step in, if need be, to check overheating of the economy.

In this context, it is significant that the apex bank has articulated its view that India's growth needs to be viewed in the context of the existing unutilised and under-utilised resources, which point to a higher level of achievable output, with "overheating" less of a risk than in developed markets.

In terms of prudential regulation, the RBI has set March 31, 2008, as the date for movement to Basel II for banks with international operations, and March 31, 2009 for other banks. This would enable a smooth transition for banks that may require a longer time to prepare for the new regulations. The expansion of priority sector lending to include services enterprises is a welcome measure.

In summary, the policy seeks to guide the economy on its high growth trajectory while adopting a watchful stance for indicators that may warrant regulatory action to mitigate systemic risk.

(The author is Managing Director & CEO, ICICI Bank.)

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