Mumbai: At the time of announcing the Monetary Policy for the year 2003-04 in April, the uncertainties facing the economy were the monsoons, the SARS epidemic and the fallout of the US-Iraq war.

Since then, the Rain Gods have been extremely kind and the monsoons have been better than anticipated. The SARS threat has vanished and the Iraq war managed to create shocks only in Iraq and the US and thankfully there was no shock on oil.

Against this backdrop, Dr Y V Reddy, the governor of the Reserve Bank of India (RBI), presented his maiden Midterm Review of the Monetary and Credit Policy for the year 2003-04 on Monday (3 November 2003).

In the review, the bank interest was kept intact at 6 per cent, the repo rate was intact at 4.5 per cent and the cash reserve ratio (CRR) was intact at 4.5 per cent. The rationale for not changing the bank rates, according to Reddy was: "If the policy framework has served the economy so well and as of today [former RBI governor Bimal] Jalan's policy has delivered more than promised, this is not the time to tinker with the rates unless necessary."

The middle class and senior citizens, which largely depend on fixed income instruments for their investments, will surely heave a sigh of relief. Some sections of the industry, however, were anticipating a cut in the bank rate, which could have given a thrust to credit offtake.

Likewise, the CRR was unchanged as, according to the governor, there was a lot of global liquidity coming in and with flows expected to continue for some time, there was at the moment no need for a fresh infusion of domestic liquidity. The RBI will also be announcing a set of new instruments for better and a more refined management of liquidity.

The Monetary Policy in April had projected a gross domestic product (GDP) growth of about 6 per cent based on a 96-per cent average rainfall, recovery in agricultural output by 3.1 per cent coupled with continuance of the upturn in the industrial sector.

The monsoons have been better than expected, industrial growth remains satisfactory and export growth appears to have been sustained. Further, business expectations are positive. The financial conditions of inflation, interest rates and liquidity and supported by the current policy stance, are expected to provide a favourable environment for higher growth and the RBI has now projected a GDP growth of 6.5 per cent to 7 per cent.

The inflation rate on a point-to-point basis is expected to be lower at 4-4.5 per cent, with a downward bias, down from previous projections of 5 to 5.5 per cent. The inflation rate could go down even further and if that happens we could see further rate cuts.

On the external front, Dr Reddy observed that the Indian forex market generally witnessed orderly conditions during the period April-October 2003. The exchange rate of the rupee which was Rs 47.50 per the US dollar at end-March 2003 appreciated by 4.8 per cent to Rs.45.32 per US dollar by end-October 2003 but depreciated by 2.3 per cent against the euro, 2.5 per cent against pound sterling and 4.2 per cent against Japanese yen during the period. The country's foreign exchange reserves increased by $17.2 billion from $75.4 billion in end-March 2003 to $92.6 billion by end-October 2003.

In April 2003, the RBI had warned exporters about their unhedged exposures but the exporters did not pay much heed to the apex bank's warnings. The RBI has now mandated banks to hedge all foreign currency loans above $10 million except for exporters who have a natural hedge.

On the credit delivery front, the RBI has announced measures for a better flow of credit to the small-scale sector and agriculture. The RBI has also proposed to set up an advisory committee to suggest short- and medium-term measures to enhance credit flow to the agricultural sector. A working group for better flow of credit to the small-scale sector has also been proposed. The RBI has also recommended that banks should provide adequate incentives to their branches in financing self-help groups and establish links with them.

Reacting to the policy, Confederation of Indian Industry (CII) president Anand Mahindra says: "It is a carefully drafted credit policy. There are no negatives, some notable positives and a distinct bias in favour of facilitating higher economic growth."

Regarding the unchanged bank rate and the CRR, CII and Assocham termed the decision in line with the excess liquidity in the system. However, FICCI and the Indian Chamber of Commerce were of the opinion that the unchanged rate and the CRR fell short of expectation.

At the end of it all, Reddy's maiden mid-term policy prescription is a no-fuss-no-frills pragmatic exercise, which seeks to steer the economy through its existing soft interest rate regime. Things are looking good and there is no need for any special measures to further shore up the feel-good factor.

When things get good, the good need not get going.