ECONOMIC HIGHLIGHTS
New Delhi, 20 April 2006
Credit Policy Support
MAINTAINING ECONOMIC MOMENTUM
By Dr. Vinod Mehta
The Reserve Bank of India in its Credit Policy for the
year 2006-07 has attempted to provide support to the growth rate of around
eight per cent without in any way unduly restricting the growth of credit. Last time the changes that were made in the
Credit Policy were during the mid-term Appraisal of the Annual Policy for the
year 2005-06, which endeavoured to encourage the high growth rate and at the
same time tried to control the rate of inflation.
The Economic Survey has already projected a growth rate of
around 8.1% during the current fiscal. The
RBI’s Credit Policy is again geared to achieve this goal. As in the last mid-term review, the RBI while
announcing its policy has been guided by two concerns – growth and inflation –
and measures announced by it are
designed to allow the economy to sustain this growth rate and at the
same time contain the rate of inflation at around 5%.
In the mid-term Appraisal in October last the RBI did not
change the CRR ratio but it raised the
reverse repo-rate – the rate at which Central Bank borrows from the banks – by
25 basis point from 5% to 5.5%. The implication of this measure was that the
interest rates both on lending and deposit will rise. The interest-rates both
for lending and borrowing did rise marginally. But in the Credit Policy for
2006-07 there has been no change in bank rate, cash reserve ratio, Repo-rate
and reverse repo-rate
During the mid-term Appraisal, the
RBI had expressed its concern over
the housing loans which have been growing at a very fast pace in the past few
years. With the hardening of the interest rates the interest rates on new
housing loans also went up marginally.
In the Credit Policy also the RBI is concerned about the growth of
housing loans which is a worrying factor.
This is also true of other consumer
loans. Therefore, it has increased
general provisioning requirements on standard advances like personal loans,
housing loans etc. beyond Rs.20 lakhs and commercial real estate loans from
present level of 0.4 per cent to one per cent. Because of this provisioning
that rate of interests on personal loans will go up by ½ per cent to one per
cent.
However, those who have been waiting for a hike in the
interest rates in bank fixed deposits may can now be sure of an increase in the
interest rates in the coming months. The
nationalized banks have marginally raised their interest rates on term
deposits, while one foreign bank has raised the interest rate on term deposit
of one year to eight per cent, which is equal to the interest rate being
offered by PPF and Post Office. At the moment the interest rate on savings bank
deposit, which was deregulated last year, is 3.5%.
The RBI’s reading is that with the competition hotting up
among the banks, the rate on interest on savings bank account will not go below
3.5%. It will be recalled that the
interest rates on the savings bank two years ago was fixed at 5%. De-regulation
means that every bank can offer any rate of interest on savings bank account
depending upon its financial health. As
of today there is no change in the savings bank interest rate in the past six
months when it was deregulated.
In this mid-term Appraisal, the RBI had also taken a step to
bring more people to keep their money in the banks. It had suggested that the
banks may introduce “no-frills” account where the minimum balance would be
either zero or very low but the account holders will have to pay for the
services like issuance of cheque
books, ATM cards and also statement of account.
Some of the new Indian private sector banks have already
offered zero balance facility to many depositors. Now this measure will also be
applicable to foreign banks operating in India. Though there is no mention of this in the
Credit Policy, many banks including foreign bank have already introduced no
frill accounts without fanfare. But it is not known if more clients have taken
advantage of this. .
The Credit Policy for 2006-07 will not raise interest rates
for investment in the economy but will curb inflation. The reason for the
optimism is that there is adequate liquidity available in the economy, that is
to say, the funds which are available for lending are available in large
quantity.
The funds to be made available to small and medium
industries have already been doubled since October last. Moreover, it may be added that the interest
rates on loans to stronger companies are always flexible and negotiable so it
is unlikely that the interest rates on loans to bigger companies will rise to
any significant extent. The loan offtake is unlikely to go down.
The RBI is still cautious about India’s current account deficit but
feels it is manageable. India’s import to GDP ratio is on the rise and it has
risen to 17.2% in the first quarter of last fiscal year from 13% five years ago
which is mainly due to increases in both oil and non-oil imports. This trend
will continue. Surplus in the capital account has, however, helped in easing
the overall balance of payment situation.
This trend the RBI feels will continue.
The Deputy Chairman of the Planning
Commission has already stated that
the economy is ready to transit from a phase of moderate growth to a new high
growth stage where it may achieve an average growth rate of about 8% over the
next 15 years. But this calls for supportive action to make this growth rate
attainable. He was particularly hinting at the increase in the FDI which at the
moment is 1% of the GDP and could be increased further through appropriate
measures.
He further observed that with
population growth slowing down to about 1.5% over the next 15 years, an 8% growth
in GDP means that per capita income will grow at about 6.5% per year instead of
around 4% or so in the past fifteen years. The faster growth in per capita
income means that per capita income which increased by 80% over the past
fifteen years will increase by 160% over the next fifteen years. This in other
words means higher living standards for the people of India.
The RBI is doing its bit to push up the growth rate and curb
inflation by way of monetary policy. It
is supplementing the efforts of the Finance Ministry. The Annual Credit Policy including the mid-term
Appraisal for the past two years have been quite consistent in their
approach.
(Copyright,
India News and Feature Alliance)
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