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.
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.
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).
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
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.
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
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.
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.
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.
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.
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.
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.
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."
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.
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
things get good, the good need not get going.