Highlights of the Monetary policy - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Highlights of the Monetary policy

May 18, 2004

The Reserve Bank of India (RBI) has retained its stance regarding interest rates and the broader economy in its monetary policy for 2004-05. The central bank has left the bank rate and the repo rate untouched at 6% and 4.5% respectively. The overall stance of the monetary policy 2004-05 as stated by the RBI is as follows:

  • Provision of adequate liquidity to meet credit growth and support investment demand in the economy while continuing a vigil on movements in the price level.

  • In line with the above, to continue with the present stance of preference for a soft and flexible interest rate environment within the framework of macroeconomic stability.

As expected, while the monetary policy did not have any major announcements, the key highlights include:
  • As far as the outlook for the Indian economy in 2004-2005 is concerned, the RBI has stated that India's GDP is expected to grow between 6.5% to 7.0% in FY05. The RBI's forecast is based on sustained growth in industrial sector, normal monsoons and good performance of exports.

  • In FY04, the RBI's inflation target was 4.0% to 4.5%. However, firm crude prices resulted in average inflation hovering at around 5.4%. RBI expects inflation at 5% levels for 2004-05.

  • The RBI has also forecasted an increase in non-food credit in the range between 16.0%-16.5% in FY05.

  • Expansion in money supply in FY05 has been pegged at 14% indicating that the central bank is forecasting a scenario of ample liquidity in the market. Fiscal deficit as indicated by the Union Budget is pegged at 4.4% of GDP in FY05.

  • The RTGS (Real Time Gross Settlement) system is expected to be implemented by June 2004, thus paving way for the stock markets migrating into the T+1 system.

  • The RBI has also proposed the reintroduction of the Capital Indexed bonds (CIBs), wherein the returns will be linked to the inflation in the economy. Instruments like CIBs are very popular in the global markets and offer an option for investors to mitigate risk of higher inflation and the consequent impact of the same on returns.

A lot of emphasis has been placed on the agricultural sector, considering the high dependence of the country on the same. RBI has provided further sops in the form of concessions in credit delivery. Banks may waive margin/security requirements for agricultural loans up to Rs 50,000. Apart from this, concessions have been made towards NPA recognition for the agricultural sector.

The RBI has also proposed to expand the scope of the infrastructure sector to include sectors like (i) construction relating to projects involving agro-processing and supply of inputs to agriculture; (ii) construction for preservation and storage of processed agro-products and (iii) construction of educational institutions and hospitals. Measures to increase credit availability to the infrastructure sector have also been proposed. Overall, these measures could enable better access of credit for these sectors in the long-term.

Having looked at the highlights, what should a retail investor draw from this policy?
The GDP growth expectations are, first of all, lower as compared to FY04. So, investors who were banking on the fact that India has moved to a different growth trajectory need to revise their expectations. Also, there are number of conditions upon which this growth expectation of 6.5% to 7% is based. If monsoons fail, this number could be revised downwards.

Secondly, RBI has mentioned that continuation of firm crude prices could impact inflation expectations as well. There could be a possibility that interest rates could edge higher in the future.

Overall, this monetary policy per se, was a non-event. However, the central bank has been consistent in its focus towards enhancing credit availability and maintaining price stability in the economy.

Read our coverage of the Monetary Policy May 2004

Equitymaster requests your view! Post a comment on "Highlights of the Monetary policy". Click here!

  

More Views on News

These Stocks Have Rallied Over 300% In the Last 12 Months. Is the Rally Justified? (Views On News)

Nov 12, 2021

As many as 150 stocks from the BSE 500 index deliver multibagger returns in the past one year.

Ultimate Guide to Hedging Your Portfolio (Fast Profits Daily)

Sep 21, 2021

How can you protect your portfolio in a market crash? Find out in this video.

Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock (Profit Hunter)

Mar 23, 2021

Affordability in the housing segment has never been so good in last one and a half decade. Here's how you could make the most of it...

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

The Biggest Winners and Losers in India's Transition to Electric Vehicles (Profit Hunter)

Nov 26, 2021

How India's EV transition could be a major headwind for the incumbents.

7 Stocks that Mutual Funds Can't get Enough of (Views On News)

Dec 1, 2021

Come hell or high water, these are the top Indian stocks which mutual funds never leave.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS