The Hindu Business Line : A light touch

There was a time when Union Budgets or Credit Policies of the Reserve Bank of India were preceded by much expectations; all those remotely affected by these policies would tend to view a pronouncement as a surprise gift or a sudden blow with public opinion mirroring these responses. Not any more. Both the Budgets and RBI reviews have a ring of bathos about them; most policy measures today seem like sets of anticlimaxes because high drama is being enacted in the real economy. So it is with the latest Mid-Term Review of Annual Policy, 2006-07 announced on Tuesday.

Despite all the confetti that the media shower on the announcement, there is no getting away from the fact that the measures were par for the course — greater flexibility in forex usage, a repo rate hike of 25 basis points, the unchanged reverse repo rate and Cash Reserve Ratio, the usual concern of inflationary pressures and the need to contain them. And as for the economy, an echo of the Finance Ministry forecasts with minor variations about the likely sideline pressures that may affect the economy's journey towards that growth target This is the fourth repo rate hike the RBI has made, to signal caution in credit growth; as the Governor put it in his statement, banks need to know that liquidity is not available on tap from the central bank and that they need to balance savings and investments. Credit has grown at breakneck speed and banks know that a buoyant economy will keep them in business despite some more rate hikes. The irrational exuberance in real-estate is partly or wholly the result of a lack of transparency in value fixations and transactions with a good deal of unaccounted money passing hands. In the absence of official data on housing prices, any interest rate hike will be more than offset by the expectation of speculative earnings.

The Policy Review, however, does move along the road to fuller convertibility by doubling the limit of individual dollar remittances abroad to $50,000; raising external commercial borrowings limits a modest $250 million; allowing foreign exchange earners to retain all their earnings in their Foreign Currency Accounts and permitting banks to borrow external funds from overseas branches or correspondent banks. Perhaps, the RBI should have allowed banks greater exposure in infrastructure projects even as a means of diverting funds from the overheating housing sector. As it stands, the Policy review contains no dramatic signals for foreign investments in critical sectors or even the capital market. Concerned about demand pressures but cautious about smothering them, the RBI leaves the stage for the growth initiative almost unchanged.

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