RBI monetary policy could help maintain stability: bankers

Mumbai, Jan 31: IDBI Chairman and Managing Director V P Shetty today said the Reserve Bank of India has tried to balance conflicting monetary policy objectives of growth versus stability including price stability.

Reacting to the third quarterly review of the annual statement on monetary policy announced by the RBI, Shetty said RBI has cautioned corporate and financial intermediaries to beware of sudden reversals in sentiment in global markets unrelated to economic fundamentals especially if triggered by geo-political facators. RBI has advised banks to ensure the hedging of their exposures and to undertake pre-emptive strategies to insulate their balance sheets from currency and interest rate risks.

The major facator facing RBI today is inflation, while weekly inflation is around six per cent, the core (manufacturing) inflation is at five per cent which is way above 2.00 per cent, that prevailed an year ago, he said in a release issued here.

Notwithstanding, relatively low oil prices, inflationary potential is huge and particularly demand-pull inflation due to high GDP, is a major cause of concern for RBI, Mr Shetty said.

''A 20 per cent year on year (YOY) rise in money supply is another area of concern. Accompanied and induced by high credit growth, growth in money supply is possibly higher than warranted which leads not only to inflation but potential for rising NPAs also,'' he said.

As per latest available data, the money multiplier (ration of broad money to reserve money) stands at 4.88, as compared to 4.76 as on March 31, 2006.

While 4.88 is quiet high, it would have touched 5.00 without the CRR hike effected by RBI recently.

RBI has adopted three pronged approach namely measured increase in interest rates to assuage demand paressures, precautionary provisioning and enhancement of risk weights to advances to specific sectors in which banks' exposures have been rising at a fast pace, secondly to ensure qualilty of credit and managing the capital inflows having expansionary effects carrying potential inflatinary pressures, Mr Shetty said.

A hike in repo rate and not in reverse repo clearly indicates that RBI would like to curtail inflation and money supply without compromising on growth, Mr Shetty said. In a scenario of liquidity shortage, banks need to ensure that growth in credit would be commensurate with deposit growth. Thus banks would be required to depend on their own balance sheet (deposit route) rather than on the RBI balance sheet (Repo route) for funding credit growth, he said.

As an effect, while short term rates will remain high, even long term rates might move higher. There will be volatility in the market, till liquidity flows in through FC resources and government expenditure.

The increase in provisioning requirement to two per cent for standard assets in the real estate sector, outstanding credit card receivable loans and advances for capital market exposure and personal loans will make the banks to increase the cost of such credit for the borrowers.

The increase in provisioning requirement to two per cent and risk weight to 12.5 per cent for banks' exposure to the non deposit taking systemically imporatant NBFCs, will compel the banks to increase the cost of credit to such borrowers. The reduction in interest rate in FCNRB and NRE deposits will make it slightly unattractive to the depositor and as a result, the flow of such deposits is expected to slow down.

Overall, market borrowing rates by banks and corporate would remain high irrespectiveof the G-Sec rates, Mr Shetty said.

Meanwhile, Jammu and Kashmir Bank Chairman Dr Haseeb Drabu, while reacting on RBI's policy stated that the season for hikes seems to be over. At least one hopes it is. The end to hikes is warranted now because from here on, what the system requires is not a directional change from high liquidity to tighter liquidity or in pricing of credit.

Instead, the need is to ensure allocative changes in credit. This can be achieved only through sectoral measures, he said.

The recourse to increased risk weightage is tantamount to going back to a system of directed lending. While, there is no dispute on the issue of provisioning, there have to be better ways to address the sectoral deployment. Banks must have flexibility. Given the regulator's long standing concern on real estate, one option could be to work out a system whereby the real estate portfolio of banks is marked to the market, he added.

UNI