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The Rediff Business Special: C Girish

'RBI is not in a hurry to ease repo rate'

As expected by experts and as stated in April by the RBI, there are no changes in the repo rate, bank rate and the credit reserve ratio. What stands out now is that the RBI has hinted at monetary tightening if the inflation rises.

The repo rate was propped up to eight per cent from five per cent in August, to protect the rupee from dollar pressure. The corporates are not happy as they are unable to raise funds at lower interest rate.

The question is: when will the RBI ease the repo rate and make cheaper lending to the corporates. The RBI does not seem to be in a hurry to do that. For on the top of the government's agenda is sustaining the exchange rate.

The credit policy recognises that the rate of inflation as measured by the wholesale price index on a point-to-point basis is currently ruling at over eight per cent and that it is significantly higher than the rate in April.

The three per cent growth in agricultural production over the depressed level of 1997-98 is a reasonable estimate at this point in time. A final conclusion can be drawn only after the new crops come into the market.

The RBI's decision -- a bolt from the blue, as it were -- to create an environment for introducing interest swaps will help call money market players, both direct lenders and borrowers, who will be permitted to swap. Suppose you borrow money for three months and lend out one year to somebody else. You are going to make money on mismatch on your risks. There is a huge market out there, you know.

On the rupee front, the central bank is still worried. Interest rate changes would have made the markets happy. But that was not to be. The RBI is optimistic that the gross domestic product will be 6.3 per cent. The estimate means that the RBI, in the context of projections for the long-term, is playing safe, in the face the southeast Asian crisis.

Seems like the RBI did not want to invite all the funds to India, considering that the southeast Asian countries did not keep track of how much they were borrowing until their economies started caving in. The RBI has chosen to take advantage of lessons from the Asian crisis; so it has settled for step-by-step growth, capital account convertibility can wait. The RBI has done well in making things safer.

(The writer is a senior analyst at Mecklai Financial & Commercial Services)

The RBI's Credit and Monetary Policy 1998-99