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

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Budget and Monetary Policy

The large market borrowings implicit in the special measures proposed in the 2003-04 Budget for (i) prepayment of high-cost external loans to multilateral agencies, (ii) enabling state governments to extinguish their high-cost debt to the government of India through debt-swaps, and (iii) buying back past high interest government loans from commercial banks are sure to come in the way of the RBI pursuing its avowed easy interest rate policy.

Reserves Build-Up: More Than Meets the Eye

Given its current level of dynamism, it is difficult to explain the Indian economy earning/acquiring over $ 25 billion of foreign currency assets in a single year. There is, therefore, more to the build-up of foreign exchange reserves than the Reserve Bank�s recent explanatory note suggests.

New Challenges before Banks

The response of the banking industry, public sector banks in particular, to financial sector reforms has been one-sided, focusing only on enhancing profitability and serving prudential goals while neglecting the role of commercial credit in the development process.

Industrial Revival: Selective and Cyclical

All available signs of industrial revival are selective and cyclical. There is no indication of an improvement in the overall investment climate.

Changed Profile of Money Market

The Reserve Bank's two-pronged approach of allowing market players freedom to operate on the basis of market signals while threatening stern measures against excessive arbitraging between markets has achieved a profound transformation of the profile of the money market.

Need to Resurrect Rural Credit Institutions

A determined effort is called for to strengthen the rural credit system by creating new institutions if necessary and strengthening the multi-agency arrangement of commercial banks, regional rural banks and credit cooperatives and assigning to them specific regional, sectoral and functional responsibilities.

Dire Impact of Drought on Saving and Investment

In the current macro-economic scenario, the adverse impact of the drought is likely to be much more severe on saving and investment in the economy than on supplies of commodities.

Signs of Incipient Industrial Recovery

Reflecting the incipient and selective upturn in the industrial sector, there has been a sizeable turnaround in non-food bank credit in the first quarter of 2002-03. A major disappointment, however, has been the term-financing institutions whose sanctions and disbursements were sharply lower in 2001-02 than in the preceding year.

Changing Financial Wind

For the last two years the Reserve Bank has enjoyed a congenial financial environment which has enabled it to manage the liquidity situation smoothly and successfully soften interest rates. However, there are now subtle signs of a change in the financial market.

Cautious, but Flexible

The RBI's latest monetary policy measures fall neatly into the policy framework pursued for the last five years with the objectives of maintaining a stable financial environment and strengthening the financial system and improving the transmission of monetary policy signals.

Cautious Capital Account Liberalisation

The achievements on the external account have been quite remarkable, most notable among them being containment of speculative forces and curbing of arbitrage. The build-up of sizeable foreign currency assets and stability in the forex market have made it possible for the authorities to carry forward the policy of cautious capital account liberalisation.

Credit Policy: Beyond Expansionary Signals

There are clear pointers in the Budget for 2002-03 to the stance likely to be adopted in the credit and monetary policy to be announced next month. However, mere expansionary signals from the RBI through reduction of the repo rate and the Bank rate and through money market instruments will not be enough. The RBI will need to address structural disabilities and distorted commercial banking behaviour in response to financial sector reforms.


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