The Reserve Bank of India is continuing with its tightening measures to control inflation as revealed in the Credit Policy. The acceptance of the suggestion of the Working Group Committee constituted under the chairmanship of Mr Deepak Mohanty to move towards a single rate regime (Repo rate) is a welcome approach, giving the bankers more clarity. The hike in the Repo rate by 50 basis points (bps) indicates that the regulator is no longer interested in taking baby steps to counter inflation, but has decided to go all out in its attempt to keep inflation under check. Otherwise, the growth momentum for 2011-12 will face added pressure due to the past and present hikes. We can have an ideal mix of continued growth and moderate inflation.
Towards deregulation
The hike in interest rate by 50 bps to 4 per cent for Savings Bank accounts is evidently the first step towards deregulation. Though the introduction of Marginal Standing Facility at 8.25 per cent provides additional liquidity for banks, it will increase the call money rates in the short-term which will force the banks to increase the deposit/Base Rates in the near future. The credit growth during the first half may only be moderate. Eventually, the cumulative effect of all these could result in banks' profitability taking a hit. Pegging the Reverse Repo Rate and MSF rate to Repo rate avoids confusion in the policy signals. It remains to be seen whether the Repo rate will eventually gain more significance or totally replace the Bank rate as a key indication.
Right moves on MFIs
Accepting the Malegam Committee's recommendations on micro financial institutions (MFIs) is a right step and continuing priority status, subject to conformity with the RBI guidelines for channelising bank loans for funding MFIs is a welcome feature.
The move to enhance the rate of provision for various categories of non-performing assets (NPAs) from 10 per cent to 15 per cent in respect of sub-standard assets and 20 per cent to 25 per cent and 30 per cent to 40 per cent in respect of doubtful categories from one to three years is welcome since it will enable the banks to build up a comfortable cushion of provisions which can protect them in case of any fresh economic meltdown occurrences. The increase in provisions for Restructured Standard Assets as well as restructured NPAs upgraded at the rate of 2 per cent is another prudent step. The regulator's advice regarding achievement of minimum provision coverage ratio (PCR) of 70 per cent as of September 2010 was obviously a preparatory move not only to address this issue, but also to move closer toward Basel III requirements.
Overall this statement is definitely a cogent document to steer the country towards growth sans huge inflation.