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Right direction, but will not help industrial growth, say economists

Syed Firdaus Ashraf in Bombay

The measures taken in the Reserve Bank of India's credit policy was welcomed by economists who said it was a step in the right direction of reforms, but doubted its ability to improve industrial growth performance.

They strongly felt the policy was a step towards the much-awaited full account convertibility, considered the unfinished agenda of the reforms which was launched six years ago.

Economist D R Pendse welcomed the credit policy. He told Rediff On The NeT, "Allowing exporters to execute projects abroad and corporates to open offices abroad without the RBI's approval is a positive sign. It shows the government is serious about full capital account convertibility and I hope the government will be able to implement the same soon."

ICICI Executive Director S H Bhojani concurred with Pendse. "The steps taken for mutual funds are heading towards capital account convertibility," he said, and added, rather dramatically, "They are revolutionary in nature."

The RBI's policy on exports has also been praised. Ewell Fernandes, head of research, CRISIL, told Rediff On The NeT that the across the board cut in pre-shipment rupee export credit by one per cent will greatly boost exports.

However, he doubted the credit policy's ability to boost industrial growth in the long term. "Industrial growth can come only from the fiscal side of the Budget and not through the monetary policy," he said.

Morgan Stanley banking analyst Amit Rajpal seconded Fernandes that the credit policy will not be able to revive the decline in the industrial growth. "We cannot draw a parallel between industrial growth and the credit policy. For industrial growth, we will have to look towards broader parameters and not the credit policy."

Agreeing with them, Pendse said, "The interest rates cut will not have an impact on the industrial growth since the earlier rates were also good enough for the industrial growth. I doubt any reduction in the interest rate at this time will lead to an increase in the industrial growth."

Rajpal, however, welcomed the freedom granted to the banks to fix their own interest rates devoid of RBI interference. "This will result in competition which is good for the people and customers at large. The customers will approach only those bank which charge low interest rates and give better service," he said.

Fernandes hailed the cash reserve ratio reduction from 10 per cent to 8 per cent. "The two per cent cut will inject liquidity into the market and lead to an increase in the profit of the banks," he said.

Added Dr Ashima Goyal, associate professor of economics at the Indira Gandhi Institute for Development and Research, Bombay, "Everyone was expecting a cash reserve ratio cut by half or one per cent and the reduction by two per cent has surprised everyone. By this step, the profits of banks will increase in the coming years."

"The credit policy, in short, has lived up to expectations," summed up Rajpal.

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EXTERNAL LINK:
The Reserve Bank of India busy-season credit policy