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Credit policy on expected lines: FM

NEW DELHI: Union Finance Minister P. Chidambaram on Friday maintained that the credit policy unveiled by the Reserve Bank of India (RBI) was “on expected lines” even as the stock markets gave a ‘thumbs down’ to the status quo in key rates and plunged to their lowest depths in recent years.

Hailing the RBI’s mid-term review of monetary policy and noting that the apex bank would take radical steps, if necessary, to tackle the financial crisis in the emerging situation, Mr. Chidambaram said: “[The] RBI will continue to deploy both conventional and unconventional tools. We cannot rely only on conventional measures but we will have to adopt unconventional or unorthodox measures.”

The RBI, the Finance Minister said, “has not touched the repo rate, [the] reverse repo rate or the Bank Rate or the cash reserve ratio (CRR) and this is along the expected lines.” However, if necessary, the central bank would infuse more liquidity and also continue to use the LAF (Liquidity Adjustment Facility) window with flexibility, he said.

In fact, to deal with the ripple effects of the ongoing global financial turmoil, the RBI had taken a number of pro-active steps during the period October 6 to 20 to inject adequate liquidity into the cash-strapped system. Initially, it reduced the CRR by 250 basis points in phases to unlock a massive Rs. 1 lakh crore from the mandatory deposits that banks have to park with it so as to revamp the flow of credit and induce lending by banks. This was followed by a sharp cut of 100 basis points in the rate of short-term (repo) lending to banks to render credit cheaper and thereby signal a softening of interest rates.

However, the bourses as well as the banks, it appears, had expected some more softening in RBI’s key rates. Thus, while banks may adopt a cautious approach and wait a while before lowering their interest rates, the downward revision in gross domestic product (GDP) growth projection by the RBI and the apparently distant prospects of lower interest rates disappointed market investors who hammered stocks down to send the Bombay Stock Exchange’s (BSE) 30-share sensitive index (Sensex) reeling by 1070.63 points to 8701.07 at close.

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