Thursday, October 29, 2009

Credit and Monetary Policy Still Influenced by Effects of Recession

Nothing new happened on 27 October. The script of the Credit and Monetary Policy announced by Reserve Bank of India (RBI) Governor D. Subbarao was written by the RBI on 26 October itself during the quarterly review of Indian economy. Although it is being said for some time that India has now recovered from the shocks of economic recession, the RBI believes that it is still time to take steps cautiously.

CRR, Repo and Reserve Rates Unchanged
No change was, therefore, made in most of the rates. Neither was any change made in the bank rates, nor in Repo Rate, nor in Reverse Repo Rate, or in the Cash Reserve Ratio (CRR).

Obviously the RBI wants that steps that were taken during recession for relief to industries should continue. They should continue to get credit at lower rates.

Danger of Inflation
One thing became clear from the 26 October report that the RBI perceives the danger of inflation, in spite of the fact that the inflation rate was below zero until a few days ago, and is still quite low. But the RBI feels that it could go up in the coming days.

For that, by increasing the Prime Lending Rate (PLR) by one percent, the bank had already indicated that it does not want any more monetary expansion at the moment.

Common Man's Concern
However, the reason for the common man's concern is not this figure of inflation, but the inflation in food commodity prices, for which the RBI is also watching the Rabi (winter) crop like everybody else. Apart from price rise, the bank sees another danger in real estate business. It feels companies engaged in this trade could get into trouble, and has made provisions for disbursement of loans to housing companies more stringent.

One problem continues, which dashes the hopes of many. The kind of scene witnessed in the stock market after the announcement of monetary policy is the result of such sense of hopelessness of several trades.

While banking companies are troubled by some limitation on their business possibilities, housing companies are unhappy that they would not be able to get loans easily now. And when housing is jolted, it has to impact on steel and cement. If crops are good, everybody would recover from these shocks. And then, the economy would also be prepared for a progressive policy rather than the monetary policy for recession.

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