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Mixed reactions erupt; technocratic credit policy from India's Greenspan, says IMC

Rediff Business Bureau

Trade and industry bodies offered mixed reactions to the Reserve Bank of India's half-yearly monetary and credit Policy announced by the RBI governor Dr Bimal Jalan in Bombay today.

The Indian Merchants' Chamber which welcomed various features of the RBI's new credit policy statement, chose to call it a technocratic credit policy designed at giving a new depth to Indian banking and financial system.

IMC president Y P Trivedi said Dr Bimal Jalan is gradually acquiring the magic touch of Alan Greenspan, chairman of the US Federal Reserve. The correlation of short-term interest rate with repo rate, the creation of reference rate and the provision of signalling capability to the financial system are significant. The decision to establish of v-sat network, the repo network and regulation of money market players reflect his technocratic skills, Trivedi said.

"It was a difficult situation for Bimal Jalan, and he has done the best that he can," said Ila Patnaik, a monetary economist at the National Council of Applied Economic Research, New Delhi.

Industrialists, however, are not too happy with the fact that Jalan has refused to tinker with the bank rate, or the credit reserve ratio and has instead chosen to tread the safe path. "The new policy is mostly non-controversial and the governor has focused on the long-term which is fine. But what about the short-term requirements?" asked an agitated Sudhir Jalan (no relation of Bimal Jalan), the new president of the Federation of the Indian Chambers of Commerce and Industry.

This sentiment was echoed by the Punjab, Haryana and Delhi Chamber of Commerce and Industry (PHDCCI), which in a statement, while welcoming the long-term measures and suggestions of the RBI governor, warned that the same should not affect the offtake of credit by trade and industry.

Patnaik said there was very little that Jalan could have done in the given circumstances. "On the one hand, he cannot tighten the credit policy thanks to the recession-like situation that exists in the country and the downturn that the economy has taken. On the other hand, he dare not loosen the credit because of fears of inflation. In fact, the NCAER had predicted that nothing much would come from the current credit policy," she said.

Economist S S Bhalla too said the credit policy was as per expectations and said the media had unnecessarily hyped the event. He pointed out that Jalan had mentioned earlier that there was no need for a credit policy to be released on a specific date every six months and that the bank rate and the CRR can and should be altered as per the demands of the market conditions.

"The policy as announced is a good policy for the present situation," said Bhalla, adding that any expectations of major changes were unwarranted. "In a market economy, the credit policy will change as per the need." Incidentally, Bimal Jalan did mention that he would announce changes whenever necessary.

Sudhir Jalan agreed and hoped that his namesake in the RBI would do so. "He may do so even within 15 days if the need arises," he said.

But the FICCI chief strongly felt that the RBI governor should have made marginal cuts in the bank rate or the CRR to help revive the economy which is struggling. "The commercial banks are sitting on a lot of money. It is just that they are afraid to lend, and here is where a word or two from Bimal Jalan would have helped," he said.

He referred to the example of the US Federal Treasury chairman Alan Greenspan's move recently to cut the interest rate nominally by 0.25 per cent, and ditto three weeks later. "The cuts do not amount to much," said Sudhir Jalan, "but it had a tremendous effect on the markets. A similar path by the RBI would have a great psychological effect here too."

The PHDCCI too regretted that the RBI's lack of steps to boost demand generation and investment, and claimed that the high fiscal deficit and government borrowing would cause further inflation.

While Bimal Jalan in his speech cautioned the government not to increase the fiscal deficit, Patnaik said that indicators pointed to an increase in the fiscal deficit. "Our money supply is 20 per cent over what it was in September 1997 thanks to the increased RBI credit to the government and because of the money available due to the Resurgent India Bonds. This can lead to inflation," she warned.

Bhalla said that given the limitations faced by the RBI due to the fears of inflation, the focus would now have to be on the fiscal policy.

There was also some scepticism about the RBI governor's statement that the GDP growth rate would be six per cent. "It doesn't seem possible. I think Bimal Jalan is just trying to talk up the economy," said Sudhir Jalan.

Patnaik too had her doubts. "On economic indicators, everything is going down except the prices of onions and unemployment. It is a questionable figure," she said.

The Federation of Indian Exporters' Organisation chairman Ramu Deora welcomed the RBI's decision of setting up a working group of bankers to simplify procedures and create an export-friendly environment.

The group, he said, will simplify procedures for credit delivery to exporters scheme so as to increase the export and utilisation of funds by exporters, he said.

Vijay Kalantri, president the All India Association of Industries, has welcomed the announcement of keeping the stability of the rupee by taking suitable measures. ''This will in fact promote and safeguard project imports and capital goods import,'' he said.

Additional reportage: UNI

The RBI's Credit and Monetary Policy 1998-99