India's war against inflation continues. With headline inflation at 9.7 per cent in September 2011 and food inflation at 10.6 per cent for the latest reported week, the RBI could not lower its guard against inflation in the current policy review despite rising growth concerns.
A moderate hike of 25 bps each in the policy rates was an inevitable response to India's stubborn inflationary pressures. However, the policy review has also given a dose of comfort to investors by stating clearly that inflation would start moderating from December 2011 and the possibility of another rate action in December 2011 is relatively low.
The deregulation of savings bank rate is a crucial policy decision as it would not just limit the depletion of real interest earnings of depositors but also improve the transmission of monetary policy impulses.
The exact impact of this move on a specific bank's profitability would, however, depend upon several factors like low-cost deposit share, operating efficiency and liquidity management of that particular bank.
The structural measures such as proposals to set up the groups to study non-discriminatory loan pricing and to review norms on loan restructuring and a warning to banks to manage carefully the foreign exchange risks from un-hedged exposures of companies would substantially improve the credit underwriting standards. On the whole, the policy has achieved an optimum balance between monetary and structural measures.
(The author is Chairman, Indian Bankers' Association.)