The Hindu Business Line : From crisis to recovery mode

This is a well-crafted policy that reflects the RBI’s seamless transition to recovery management from crisis management mode. The central bank’s intention to sequence the “exit” in a calibrated way, without hampering the recovery process is clearly visible.

While care has been taken not to hike the borrowing costs for productive sectors, there has been a tightening of the prudential norms. As a result, the key policy rates and CRR have been left untouched but the SLR has been restored to 25 per cent. A hike in the SLR is consistent with the current size of the government borrowing programme.

By urging banks to maintain higher provisioning against NPAs, by increasing the provisioning requirement for their realty exposure from 0.4 per cent to 1.0 per cent and by linking the risk weight on banks’ exposure to infrastructure NBFCs to such NBFCs’ ratings, the RBI has again emphasised its clear focus on maintenance of financial stability.

Revision, reform

Some of the steps taken during the global meltdown have been reversed. These include withdrawal of forex swap facility for banks as also removal of the refinance window for banks to fund mutual funds and NBFCs. Moreover, the limit for export credit refinance is now back to 15 per cent from 50 per cent of eligible outstanding export credit.

The RBI has carried forward the reform process even during difficult times. A move to allow currency futures trading in euro/rupee, yen/rupee and pound sterling/rupee is a welcome move and meets the pending demand of industry.

As 80 per cent of the government borrowings programme is complete, the RBI has revised downwards the desired M3 expansion rate to 17 per cent from 18 per cent and has kept unchanged the deposit growth target at 18 per cent. However, it has pegged bank credit growth to 18 per cent from the earlier 20 per cent, as credit demand still remains weak.

Inflation forecast

The pressures on food prices on account of the weak monsoon and firming up of global crude prices has forced the RBI to revise upwards its inflation forecast for March 2010 to 6.5 per cent, with an upward bias. However, the ongoing recovery in the industrial and services sectors and the resumption of private capital inflows have given the central bank enough confidence to keep unchanged its GDP projection at 6 per cent, with an upward bias.

To conclude, the Policy optimally tackles the exit from an accommodative monetary policy stance with due consideration to resilience of the recovery process and financial stability. On the whole, the RBI has balanced well the need to tackle inflation and opening up new avenues to step up credit growth.

(The author is Chairman and Managing Director, Bank of Baroda.)

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