S. Mahalingam

Traditionally, the IT and ITeS sectors have not been watching the Credit Policy reviews keenly as its impact on them is not very significant. But, of late, just as the IT players have become alive to the Fed Rate Meet to understand the dollar behaviour, they picked up the threads with the Monetary Policy. Inflation, exchange rate movements, risk management and taking cover have assumed growing importance due to the turn of events, and the monetary policy has come under sharper focus.

Looking back a little, we can see the magnitude of the currency appreciation problem: From the relative comfort zone of 43.50 to a dollar in March, the rupee has had a high speed ride to 39.50 in just fewer than eight months. For the sectors that are already facing such margin pressure, cost management has become extremely critical. Thus, credit policy, with its bearing on inflation control and impact on capital expenditure, cost of borrowing (especially construction costs), together with liquidity squeeze and exchange rates, assumes greater significance.

The surge of external funds into the capital market and the rising stock market (with Sensex breaking the 20000 barrier yesterday), all seem set to race further in the same direction. The moot question is: How would such massive inflows from external sources and relatively tighter internal capital augur for the country’s growth agenda?

In this quarterly review of the Credit Policy, the RBI has chosen to maintain the policy rates at previous levels in the face of a fairly stable price regime. The central bank has also chosen to moderate credit growth marginally, announcing a 50 bps hike in CRR. Lenders will have to hold back just a trifle more cash reserve and we will have to wait and watch its effect on borrowing cost. I do not believe the policies announced will have a significant impact either on stock market or on interest rates. More critically, the exchange rate continuing the current trend has emerged as a top area of concern, which could be a challenge in keeping up the momentum of export-led growth.

Today’s global marketplace has transformed the environment for monetary policy operations significantly. The emerging markets are major players now, having enlarged the global supply as well as global demand: And, they have also been investing in the developed economies.

With renewed emphasis on the “global economy story”, the RBI has now expressed surplus liquidity as a priority for attention. The RBI, as always, will use all instruments available with it such as repo/reverse repo (overnight or longer term), LAF, open market operations, MSS, and so on, as the situation demand. Corporates are now allowed to write covered call/put options and receive premium; authorised dealers can run cross currency option books.

To their credit it must be said that the growth agenda with inflation control, which was the main plank in the last period, has met with a fair degree of success. The average annual growth looks healthy, inflation has slid down to the 3-odd per cent from the previous 6-plus per cent and bank loans show a slowdown.

However, in today’s context, economic and financial stability, rather than mere price stability, have emerged as the key objectives. Therefore, at this time, we need to give a positive impetus to the export sectors which are potential engines of growth and vehicles of economic transformation. The current policy has preserved the status quo. However the concern on exchange rate movement still remains.

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