Mumbai, Nov 18: Yaga Venugopala Reddy's maiden monetary and Credit Policy is certainly a cautious one. Typical of a central bank Governor, Reddy, a seasoned banker has stuck to tradition to ensure that he does nothing to rock the boat. Making a debut, the new Reserve Bank Governor has chosen to err on side of caution to blend continuity with change playing a straight bat by not making any changes in bank rate, a barometer for interest rates, kept unchanged at six per cent, cash reserve ratio at 4.5 per cent. This has belied the expectations of industry which has been expecting a 0.5 per cent cut in bank rates so that interest rates further softened to make the cost of capital cheaper. Bank rates are those at which commercial banks borrow from central bank. If bank rates are low, the interest rates are expected to correspondingly fall. But what has happening lately is that though bank rates have been reduced by 0.5 to one per cent in credit policies during the last two or three years but banks have not passed on fully the rate cut to borrowers. So Reddy is right in saying commercial banks could do more to cut interest rates without expecting a cut in bank rates.
Also there was uncertainty over global economic recovery with United States and Japan not doing all that well. So Reddy was justified in being cautious and if there was a market global economic recovery, he need not wait for the next credit policy for bank rate cuts.
Likewise there was no change required in cash reserve ratio. Though credit off-take of banks has improved, they are still flush with funds. Cash reserve ratio is that percentage of bank deposits which has to be kept as reserve with reserve bank. Lower the cash reserve ratio higher the money available with commercial banks for lending. So his emphasis in the credit policy is to improve the delivery, pricing and culture of banks to ensure stability.
What is more significant in the credit policy is that Reserve Bank has revised upwards the growth forecast to 6.5 to seven per cent from its projections in April of six per cent. This is something for rejoice as it signals economic recovery and the return of feel-good factor, crucial for stepping up investments. Reddy has also projected a cut in inflation rate to 4-4.5 per cent, besides announcing new instruments to improve liquidity management.
The gross fiscal deficit of the central government at Rs 81,014 crore up to September 2003 was higher by about 40.3 per cent over the corresponding period of last year and constituted 52.7 per cent of the budget estimate for the current year. Revenue deficit of the central government at Rs 65,427 crore in the first half of the fiscal was higher by about 37.4 per cent over the corresponding period of last year and accounted for 58.3 per cent of the budget estimate of the whole year. The state governments have prepaid Rs 32,602 crore of Central government debt by borrowing from the market (Rs 22,089 crore) and also utilizing a part of the additional receipts under small savings (Rs 10,513 crore). Such market borrowings by the state governments were in addition to the normal market borrowings of Rs 16,663 crore.
The persistence of large aggregate borrowing of the central and state governments continues to be a matter of concern. Such concerns arise both out of a possible adverse impact on the desired acceleration in growth that is consistent with stability, and also from possible implications for efficient monetary and debt management.
Bureau Report