The monetary and credit policy for the first half of 2003-04 has been announced. The governor of the Reserve Bank of India, Mr Bimal Jalan, has never believed in this ritual of twice-a-year changes in credit policy, which are a legacy of the control era. Instead, changes in the bank rate or cash reserve ratio should occur whenever necessary. Mr Jalan said recently that the gross domestic product growth in 2003-04 is expected to be 6 per cent (unless the monsoon plays havoc) and inflation will be between 5 and 5.5 per cent. These expectations have been repeated in monetary and credit policy announcements and reflect the RBIís dilemma. How serious is inflation, with the wholesale-price-index-measured inflation having crossed 6 per cent in March' Some inflation is because of global oil prices increasing and these effects being transmitted domestically. With the Iraq war over and oil prices softening, this inflationary component will be dampened. However, over and above the oil price effect, there is also some evidence of manufacturing prices increasing. Consequently, how concerned should one be about inflation and excess liquidity in the system' Or should one push for a softer interest rate regime, as the North Block desires'
The RBI has decided that 6 per cent plus is not the underlying rate of inflation and one cannot disagree with the trend-rate of 5 to 5.5 per cent, assuming that a bad monsoon does not increase primary product prices. The meteorological department does forecast a below-normal monsoon in 2003; nor can one disagree with the RBIís growth projection of 6 per cent, unless the monsoon is disastrous. After all, export figures for 2002-03 have just been published and these (excluding services) show a dollar growth-rate of 18 per cent. The 12 per cent target for 2003-04 is feasible and coupled with domestic demand, should stimulate industrial recovery. However, there are question marks about investment and thus, the RBI has decided to slash the bank rate by 0.25 per cent to 6 per cent and the CRR by 0.25 per cent to 4.5 per cent.
But there are enough caveats in Mr Jalanís speech to indicate that both nominal and real interest rates are fairly low, and expectations of further softening are unrealistic. Moreover, a reverse contraction could happen, even before the next instalment of the policy in October. The RBIís report on currency and finance for 2001-02 made the point that despite competition in the banking sector and drops in deposit rates, benefits have not been passed on through lower real lending rates. While the investment problem is largely structural, prime lending rates are too high. The point that PLRs are not linked to the actual cost of funds is also made in the speech. The RBIís future attempts at banking-sector reform will be directed towards solving this problem. This is the substantive point in this version of the policy, changes in some non-resident Indian deposits or housing finance only having sectoral significance. There is nothing to applaud. But substantive changes were not expected either.