ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Restoration of Normalcy

. What the CCIL has done with the possession of such massive details of trade Restoration of Normalcy deals is impressive. It has begun to release The outlook for the domestic money and gilt-edged securities market is increasingly but cautiously influenced by the perception that the declining trend in interest rates has come to an end. The caution exercised by the market players is being reflected in the restoration of the yield curve to its normal upward sloping shape, with the spread between different maturities gently widening.

Policy Reversal on Small Savings Rates

The policy reversal on small savings rates has a number of adverse implications. As the Y V Reddy Committee had pointed out, even the benchmarked determination of administered rates of interest on small savings can only be viewed as an interim measure, pending pension fund reforms and an old age security scheme. In the meantime, the savers have to be exposed to more realistic yield rates. This, the reversal of policy prevents from being achieved and in turn it is likely to hinder the final reform process.

Banks' Performance: Limited Achievements

Banks have not paid sufficient attention in the post-reform period to the societal goals that they were expected to pursue. For this, at least in part the Reserve Bank must take the blame. Its system of monitoring the banks' performances under various regulations is at best inefficient and at worst biased. While it makes a rigorous review of prudential norms attained by banks, it does not attempt to evaluate and enforce targets set for societal goals.

Limited Response to Expanding Liquidity

The response of the central bank to the rapidly expanding liquidity due to the high inflows of foreign currency assets invites comment. The approach adopted and the concrete measures proposed are more short-term palliatives rather than fresh ideas for deploying these vast investible resources productively. Unlike countries in south-east Asia, concerted efforts are required in India to channel these capital inflows to supplementing domestic saving and strengthening physical infrastructures through well-calibrated delivery of project finance and other institutional credit. The central bank of the country cannot be content with merely encouraging banks and financial institutions to carry on their treasury operations with the help of such liquidity.

New Credit Policy

The new credit policy has sought to address the sharp disjunctions between, first, the central bank's interest rate objectives and what happens in reality and, second, the commitment to ensure adequate credit availability to the productive sectors and the growing neglect of agriculture and small and medium enterprises in actual credit dispensation.

Tracking Exchange Rate Movements

A properly constructed real effective exchange rate can be useful not only for research and analysis of longer-term trends in international competitiveness, but also to project correctly the short-term movements in the rupee's exchange rate.

Bank Credit Conundrum

The impact of the merger of ICICI with ICICI Bank on data on bank deposits finally tapered off with the fortnight ending May 16 this year. However, in regard to credit to the commercial sector the impact is retained at the initial level in RBI data on money and banking. In the interest of understanding and analysis of trends in the economy the RBI must clear up the confusion in bank credit data.

Strengthening Dynamic Role of Monetary Policy

The repo rate exceeding the overnight call money rate continuously for months and the forward premia for the US dollar in the domestic forex market dipping below interest rate differentials may be said to reflect loss of effectiveness of monetary instruments. To restore the dynamic aspect of monetary policy, action on three fronts is called for.

Clearing Corporation Makes Its Mark

With the astronomical rise in the volume of transactions and multiple layers of financial operations, there is vast scope for reducing transaction costs and counterparty obligations and minimising financial risks by converting gross obligations into net. The Clearing Corporation of India Limited (CCIL) has assumed this role and within a little over a year has emerged as a major facilitator of transactions in gilt-edged debt, inter-bank forex market and money market instruments.

Exchange Rate Management:Sense of Drift

The many challenges thrown up by the large inflow of foreign currency assets and the rapid build-up of foreign exchange reserves are not being faced frontally. Decisive actions on the exchange rate front will have major beneficial effects for the economy.

Growth vs Inflation Control

The reduction in the Bank rate and in the cash reserve ratio effected in the latest credit policy statement may appear small, but what is significant is the signal conveyed to the market that the policy of supporting investment by providing adequate liquidity and a softer interest rate environment will continue.

Secondary Market to the Fore

The growth of the financial market in 2002-03 was much more marked in the secondary market than in the primary segment. Turnover in all three components of the secondary market - equity, debt and forex - continued to grow apace.


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