The constellation of economic and financial indicators at the second quarter review of monetary policy points more to persistent threats from inflation than immediate opportunities for growth.

The RBI has, therefore, opted to continue with its efforts to douse the embers of inflationary expectations with a hint/hope of a possible policy easing in the fourth quarter.

In the meantime, by cutting CRR by another 25 basis points, the RBI has made available Rs 17,500 crore for meeting the commercial needs of the ensuing busy season.

Banks are expected to channel these funds mostly to retail production and consumption, taking advantage of the festive season, the recent liberalisation of priority credit norms and the various growth stimuli that have been announced by the Finance Minister in recent days.

NPA PROBLEM

However, banks are unlikely to tweak interest rates in the immediate future considering the mounting pressure on profitability from rising NPAs. The review has underscored the threat from NPAs and hiked the provision for restructured standard accounts from the existing 2 per cent to 2.75 per cent, further squeezing profitability.

Bond yields are poised to remain range-bound with a soft bias on the hope of monetary easing in the later part of the financial year.

The review has made significant observations and announcements on developmental and regulatory policies in regard to financial stability, financial markets, credit delivery and financial inclusion, customer service, and regulatory and supervisory measures.

INFORMATION FLOWS

The need for sharing credit and other information, particularly in the context of multiple banking, among banks has been highlighted as a crucial factor in containing NPAs.

It is proposed to harmonise the definition of infrastructure for the purpose of banks’ lending which will go a long way in banks formulating their exposure to core sector lending. The RBI is examining the feasibility of introduction of long-term fixed interest rate retail loan products which will be welcomed by retail borrowers.

The reporting system for implementing the roadmap for provision of banking services in unbanked villages has been tightened.

Towards universal financial inclusion, the first meeting of the Financial Inclusion Advisory Committee is to meet in December. Branch authorisation policy for opening administrative/controlling offices in Tier 1 centres has been relaxed.

(The author is Chairman and Managing Director, Indian Overseas Bank)

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