Credit where it?s due
It is no coincidence that a day after the RBI announced its Monetary and Credit Policy for 2006-07, global ratings major Standard & Poor?s revised its India outlook from ?stable? to ?positive?.india Updated: Apr 20, 2006 00:46 IST
It is no coincidence that a day after the RBI announced its Monetary and Credit Policy for 2006-07, global ratings major Standard & Poor’s revised its India outlook from ‘stable’ to ‘positive’. Though not a rating upgrade — India has still not made it to ‘investment’ grade — it does indicate that if current trends persist, the chances of an upward revision are good. In many ways, this reflects the central bank’s outlook on the state of the economy. The significance of the new policy lies as much in what has not been done as by what has been done. By leaving the bank rate untouched, it has ensured that the cascading tier of interest rates built on this foundation remains largely unaffected. This is good news for a growing economy, and the industrial sector in particular.
By leaving the statutory cash reserve and liquidity ratios alone, it has ensured that banks will have sufficient funds to meet rapidly escalating demand for credit. And by not modifying the repo and reverse repo rates — the means used by the RBI to inject or suck out liquidity from the system — alone, it has signalled to the banking system that it is capable of meeting all legitimate requirements of the system. The ghosts of March, when banks were scrambling for liquidity, have been exorcised.
What has been done is equally significant and is likely to hit ordinary consumers harder. After increasingly strongly-worded expressions of concern over the highly skewed growth in loans to the relatively risky real estate sector (matched by surging real estate prices
fuelled largely by money created by a booming stock market), it has once again forced banks to increase risk-weight provisions and also warned that it would even intervene to ensure that non-food credit growth does not top 20 per cent. The upside is that a potential bubble burst could probably be avoided. On the downside, higher capital costs will make retail loans of all description costlier. This may impact the changing contours of an increasingly consumerist economy, which has played a large role in shaping the India growth story.