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'The credit policy increases the expectations from the Budget'

S S Bhandare

By and large, I think the credit policy is not up to expectations. I say this because a lot of things were written in the financial media about how the credit policy has not been able to keep the high aspirations of all sectors. But I feel the Reserve Bank of India governor is justified because this is his maiden credit policy.

Business circles expected the credit policy to reduce the cash reserve ratio and thus push up stock market sentiments. I feel the credit policy has not been able to meet expectations, considering the fact that there has been an improvement in the financial flows in the banking sector in the last three to four months.

By and large, the credit policy indicates that the CRR will be reduced as and when the need arises. But I feel the governor should do it in such a way that the benefits of the CRR reduction should flow into certain deserving channels. For example, infrastructure and housing finance.

Last year, then RBI governor Dr C Rangarajan kept a 17 per cent target to keep a check on the money supply. This year the target is 15/15.5 per cent. I think Mr Jalan is trying to bring down the pace of growth of money supply. From that point of view, inflation will be automatically checked.

If you see the inflation statistics, you will find out there are certain commodities whose prices fluctuate. The rest of the manufacturing sector shows stability in prices. Also, the prices of petroleum products have declined. All these factors will benefit India in managing inflation.

I feel on the manufacturing and external sides, there is no major threat to inflation. What we will have to manage is the supply of essential commodities.

About reducing the bank rate from 10 to 9 per cent, I think it is an excellent step. Bank rate reduction is necessary for the cost of borrowing for the government of India and industry. It is also desirable for export financing. Overall, the credit policy is a positive sign to boost the economy.

As far as foreign exchange rates are concerned, it will be decided by market forces. It will depend on the supply and demand situation, and also on the total amount of transactions and speculation in the market.

The responsibility of the Budget increases because of the credit policy. The credit policy, to some extent, is a good precursor as it has brought down bank and interest rates. But the basic investment growth will have to come from the Budget which will have to take the responsibility of capital expenditure.

The good points of the credit policy are first, it is an interest rate reduction policy. Second, the promise that the credit policy is not a once-and-for-all kind of an activity but there will be fine tuning if the need arises. And third, the regulation of the fact that in case of a major event, there is a willingness to reduce the cash reserve ratio.

The bad points are that it is not clear on how to bring the reduction in the money supply growth from 17 per cent to 15/15.5 per cent. And if the governor is so concerned about bringing it down to 15/15.5 per cent, then obviously growth will suffer. Because you cannot have a 15/15.5 per cent money supply growth rate and also a high real per cent GDP growth rate simultaneously.

The second bad point is that the policy remains incomplete. So much work has to be done on the Narasimhan Committee, the Khan Working Group, and the Gupta Committee recommendations.

Overall, I think all credit policies are the product of their consensus. Dr Rangarajan had certain advantages when he presented the last two credit policies. Bimal Jalan does not have those advantages. There is, for example, the entire Asian currency crisis in front of Bimal Jalan. So he has to tread cautiously. Considering all these things, I think he has done a fairly good job.

S S Bhandare, chief economist, Tata Services Limited, spoke to Syed Firdaus Ashraf.

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