Macro Perspective A Refreshing Change

Monetary and Credit Policy
THE latest monetary and credit policy announced by the RBI on April 29 in respect of the first half of 1998-99 seeks to make a significant, even if guarded, departure from the earlier policy stance. To begin with, there is the noteworthy admission that the analytical framework underlying monetary policy hitherto, which has accepted the stability of the money demand functions as its cornerstone, requires rethinking. Though the RBI governor's statement singles out recent financial innovations as the cause for this reconsideration, sufficiently strong reasons for adopting an eclectic approach to the formulation of monetary and credit policies as suggested now had already existed. The bi-directional nature of the relationship between money, output and prices had been long recognised and the monetary character of inflation ingrained in the existing framework questioned. The influence of the level and structure of interest rates on money demand has been a proven factor now for over two decades. "A striking aspect of credit policy in 1974-75 was the emergence of interest rate as an important instrument of monetary management"; so had said the RBl's Annual Report for that year, more than 20 years ago. Despite the interest rate weapon being effectively deployed from time to time, its use in the RBl's thinking on policy framework has generally fallen by the wayside during the past decade or so, essentially because of the dominating influence of monetarism. Such a blinkered approach to monetary policy formulation hitherto had prevented the authorities from seeking a more positive role for money and credit in the development process. Therefore, the promise now made by the RBI governor to look for a wider set of indicators from the domestic financial and foreign exchange markets, including credit movements, juxtaposed with output and other real sector data, should open up a new and welcome path. A second refreshing change is seen in the importance given to institutional and structural features of the financial system rather than the focus being on such broad macro numbers as M1 and reserve money and their relationships. That such a fresh thinking was in the offing was evident from the appointment of three committees by the new RBI governor immediately on taking charge-two one-man committees for studying credit delivery inagriculture(R V Gupta) and small-scale industries (S L Kapur) and a working group of chairmen of commercial banks and development finance institutions(DFIs) under the IDBI chairman S H Khan on harmonising the regulatory environment for banks and DFIs. The observations contained in the RBl's credit policy statement in respect of these areas - though not many policy decisions have been formulated as yet bring out the freshness of thinking that is being brought to bear on the whole financial sector policies; the proposed reforms in the financial sector are being carefully crafted. For instance, the preference expressed by the authorities hitherto has been to rapidly move towards the concept of Universal banking' and abolition of the distinction between banks and DFIs. But the RBI governor's latest policy statement puts forth significant words of caution and promises a ''discussion paper" setting out the RBI's draft proposals "for bringing about greater clarity in the respective roles of banks and financial institutions and for greater harmonisation of facilities and obligations applicable to them". In the case of institutional credit for agriculture, the emphasis would be on simplification of delivery mechanism and a substantial reduction in paper work, The question of strengthening of institutions for rural credit, which is a crying need of the hour, remains however to be addressed.