MUMBAI, March 30: Stability on the external front will be the main plank of the Reserve Bank of India's monetary policy for the first half of 1998-99. This is in conformity with the new government's commitment to maintain the stability of the Indian currency against the greenback.RBI insiders say that the integration of the forex and money markets is less of a priority with governor Bimal Jalan than it was under C Rangarajan. The central bank apparently feels that ensuring stability on the forex front might mean having to build walls between the forex and money markets -- something which the Rangarajan era tried to raze down.
The RBI is also likely to use the cash reserve ratio (CRR) as a more potent tool than the bank rate as a signalling device for interest rates.The market is eagerly awaiting the first monetary policy of Bimal Jalan, known for his pro-growth stand. This will also be the first-ever monetary policy announced by the RBI after the change of government at the centre.In the monetary policyfor the first half of 1997-98, the central bank had revived the dormant bank rate and announced phased cuts in CRR to 8 per cent. However, the current thinking in the Reserve Bank is not to push for sudden CRR cuts and integration of different markets--as charted out by the former RBI governor.
However, stability of the rupee does not mean defending the currency at a particular level. "The concern is not about the erosion in the intrinsic value of the rupee but the stability in the forex market," sources said. The Indian rupee depreciated by 10.6 per cent vis-a-vis the dollar between April 1, 1997 and March 30, 1998 after sliding to a historic low of 40.45 in mid-January.
That Jalan is not overtly worried about the value of rupee is evident from the fact that after ruling at 38.50/60 level in February the rupee slipped again, breached the 39 level and gradually settled at 39.50 over the last few days.
But the RBI has nevertheless rolled back its tight money measures announced in mid-January.
"Theprimary objective of the monetary policy will be to stem volatility in the forex market -- triggered by speculative attacks on the currency -- at any cost as India cannot afford to experience the fate of Thailand or Indonesia at this point of time," sources close to the central bank said.
The Indonesian rupiah depreciated by 75.1 per cent between August 1, 1997 and January 30, 1998, the South Korean won by 41.6 per cent, Thai Baht by 39.4 per cent, the Malaysian ringgitt by 6.8 per cent and the Phillipine peso by 31.5 per cent.
The one-point programme of reining in instability in the forex market may push the RBI agenda on integration of markets backward. In the last two monetary policies, former RBI governor C Rangarajan took several steps to pull down the walls between the money and forex markets. Jalan reversed the trend and did not allow excess liquidity in the domestic market to spill over to the forex market.
"Jalan may continue to pursue the same policy to deter possible speculative attacks onthe rupee," sources said. In other words, the new governor may not opt for further cuts in banks' cash reserve ratio (CRR) to generate liquidity if it is seen as affecting the rupee's stability.
"As of now, there is a liquidity overhang in the system. If the deposit growth continues to be steady, there may not be any need for a further cash-reserve ratio cut," sources said. "However, heavy government borrowings can queer the pitch," the sources added.
Inflation control and availability of bank credit at a reasonable real interest rate will continue to be two pillars of the monetary policy. However, Jalan is unlikely to give too much of importance to the broad money (M3) growth target. In 1997-98, the M3 target -- fixed at 15.5-15 per cent -- is likely to be marginally exceeded.
"As long as inflation is under control, credit is available to the corporate sector and the rupee is stable the Reserve Bank of India may not bother about the exact quantum of inflation and M3 growth in percentage terms," sourcessaid. The M3 target in the next fiscal is likely to be pegged at the same level as that of the current year.
The Reserve Bank of India's other priority area is to facilitate infrastructure funding. It will put in every effort to ensure flow of funds into the port, power and telecom sectors as road projects may take time to take off due to land acquisition problems.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
