On the menu: Liquid diet for fixed income

Against the backdrop of global uncertainty and high oil prices, the RBI has sent out a strong signal in favour of price stability and growth. The Reserve Bank's increased optimism on and reviving investments ensures commitment to aligning monetary policy with the broader objectives of growth and stability. Indications that the growth momentum is extremely strong and credit growth has been the fastest in 55 years, is heartening and alludes to the strength and resilience of the underlying domestic economy. Further, we draw comfort from the fact that an is underway in India and that will support growth on a sustained basis in the medium-term. In line with the budgetary announcements for 2005-06, the policy seeks to strengthen credit to the farm sector, infrastructure, micro-finance and the small and medium industrial base of the country. The credit policy has also made a distinction between monetary policy and developmental policies. These will provide a framework for the monetary, structural, and in response to requirements of growth and development. In an increasingly dynamic and interdependent world, where growth is a key priority, inflation containment and liquidity management rests at the core of monetary policy conduct. In such a situation, appropriate monetary responses to supply side shocks (oil in this case) are crucial. To this end, the RBI has been pre-emptive by hiking policy rate by 25bps, which indicates that inflation containment is core to monetary policy conduct. We believe that low inflation rates and well-managed inflationary expectations are crucial for maintaining interest rates at reasonable levels and hence, strengthening the overall growth process. The announcements critical for the markets, which will be considered in consultation with the government, include restructuring the underwriting obligations of PDs (primary dealers), allowing PDs exclusivity in primary auctions, introduction of When Issued Market and limited short selling in government securities. These moves can signal the next phase of reforms in the fixed income markets, and add liquidity and volumes. We are also encouraged by moves towards providing greater freedom to corporates to actively manage their risks, especially allowing banks to approve proposals for commodity hedging in international exchanges for their corporate customers. In addition, the permission to cancel and rebook all eligible forward contracts, irrespective of tenor is encouraging. Together with being pre-emptive, the RBI also seeks to be responsive to changing times, given increased linkages of the domestic economy with the rest of the world, by looking at reviewing the policy every quarter rather than the customary semi-annual practice. Our view and supporting points: A post-election slowdown in the US and a policy induced soft-landing in China should moderate growth in these economies. Slower global growth in 2005 should take the steam out of commodities. Oil prices will also recede in line with this trend. At the same time, we believe that the Federal Reserve will continue to hike its key policy rate in baby steps till September and take rates up to 3.75% from 2.75% currently. It needs to be recognised that oil continues to play the role of a wild card in the inflation control exercise. Our view on domestic growth is consistent with that of the RBI. (Jaspal Bindra, General Manager, South Asia, Standard Chartered Bank)

On the menu: Liquid diet for fixed income

The credit policy has also made a distinction between monetary policy and developmental policies.

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