The current credit policy has at last brought a sigh of relief to all those who feared further interest rate hikes and a possible adverse impact on the daily budgets of households too. Thankfully it has been decided to wait to get a feel of the full impact of the successive hikes that have been effected over the last year or so. Of course the reduction in the risk weightage on housing loans up to Rs 20 lakhs, from 75 per cent to 50 per cent, clearly shows that the RBI has taken cognisance of the common man's needs. It is to be hoped this measure is not temporary and is carried forward in the long term.
But it is well to remember that only a few days back the RBI had taken strong measures, such as hiking the cash reserve ratio and the Reverse Repo and mopping up as much as 10 billion dollars out of the banking system. This, combined with the continued hardening of interest rates over the last one year has adversely affected some of the segments of the economy. This is clearly evident from the slowdown in the consumer durables segment and the automobile segment, which are relatively sensitive to interest rates, not to forget the housing segment, which has been the engine of growth for many a developed economy. Worst hit in the process has been the common man, desirous of owning a home. Not only did the rates go up but those who had taken the loan liability at lower rates had to cough up higher amounts which were not budgeted for. Of course, there seems to be some course correction on this front as stated above.
Although the RBI has not hit the economy with its interest rate missile this time, it has made it amply clear in the Annual Policy stance that it will not tolerate any increase in the inflation rate beyond the 4-5 per cent range. The objective is understandable. However, the RBI should bear in mind that it should target the actual cause of inflation rather than hitting the segments not responsible for inflation and hence slowing growth in general at a stage when India has just about started to become the centrestage of action and seems to be moving on the higher growth path.
The data clearly shows (and this has been stated repeatedly) that the main cause of inflation has been the primary articles, which have contributed around 35 per cent to the inflation. In addition, this was also a cyclical problem that appears to be coming under control. One wonders how these successive hikes could have helped improve the supply side bottlenecks on the primary article front.
How can an interest rate hike help bridge the inefficiencies on the supply side? This is a question that RBI needs to introspect on before repeating these measures. Hopefully RBI from now on will not take any measures that could slow the pace of economic growth.
Apart from stabilising the inflation rate, the policy stance is clear on maintaining the desirable liquidity in the system for productive purposes. The RBI must ensure that while targeting one goal it does not miss the other stated goal, of growth.
The RBI also needs to focus on the reasons for slow credit growth in the Small and Medium Enterprises (SME) segment.
As the FICCI survey on credit policy clearly brings out, banks even today are reluctant to lend to this segment. SMEs continue to face problems such as unnecessary paper work, high collateral security, high processing fees and prepayment charges, sanction delays and the risk averse attitude of bankers. The RBI must spend its energies in analysing and tackling these operational issues appropriately.
The policy also has several good features apart from keeping the rates untouched, which has cheered the business community and will help fulfil India Inc’s vision of becoming a global player. The enhancement of overseas investment limit up to 300 per cent of net worth and enhancement of portfolio investments up to 35 per cent of company's net worth will go a long way in helping Indian companies achieve their global aspirations.
The RBI also seems to be moving firmly but in a calibrated manner on the path of capital account convertibility (CAC) as recommended by the Tarapore Committee. A calibrated approach will help in obtaining the benefits of CAC and at the same time analyse the impact of any shocks that may arise, preventing disturbing the economy in general, unlike the South East Asian economies which took a severe hit due to complete CAC a decade ago.
Habil Khorakiwala is President, FICCI