Rating agency ICRA said on Tuesday that a remarkable aspect of the Reserve Bank of India's Monetary and Credit Policy for the First Half of 2004-05 is its timing.

"This is the second time in a decade that a major monetary policy announcement has been made before the tabling of the Union Budget in Parliament," said ICRA in a statement in Mumbai.

The Monetary and Credit Policy 2004-2005

The Credit Policy targets a 14.0 per cent M3 growth, consistent with an inflation target of 5 per cent and real gross domestic product growth of 6.5-7 per cent during FY2005.

Based on this projected M3 growth, aggregate deposits of scheduled commercial banks are projected to grow at 14.5 per cent, while non-food bank credit to the commercial sector is set to increase by 16-16.5 per cent.

ICRA said the significantly higher M3 growth during FY2004 (against the targeted figure) may be attributed directly to the continued surge in the RBI's net foreign exchange assets.

"The year-on-year growth in NFA has been in excess of 30 per cent for the last three years (in 2003-04, it touched nearly 40 per cent) and has posed a challenge to the conduct of the RBI's monetary policy.

"Given the situation, the RBI has recently launched a Market Stabilisation Fund to neutralise the impact of such foreign exchange inflows into the monetary base. "Interestingly, the continuing surge in NFA has actually resulted in the RBI running out of its stock of rupee securities and the MSF has been set up to counter this development," said ICRA.

As for the GDP growth rate projected for FY2005, even though it appears reasonable, ICRA felt the projection of a 5 per cent inflation rate calls for some comment.

"The projection of a 6.5-7 per cent GDP growth rate for the current fiscal, in consonance with a higher-than-anticipated inflation rate, clearly emphasises the apex bank's expectation that growth in FY2005 will be across sectors. The apex bank has already assumed that there may not be any significant supply shocks in FY2005."

The RBI has kept the bank rate and the cash reserve ratio unchanged at the current levels of 6 per cent and 4.5 per cent, respectively -- a move warranted by the current liquidity situation.

Further, with growth trends in the rest of the world moving up, the easing cycle for monetary policy in the developed financial markets may have ended, said ICRA.

"Going forward, this provides little reason for India to signal any further downward movement in interest rates. However, if capital inflows continue to remain strong, the RBI will face further challenges given that an increase in interest rates may provide a fresh impetus to capital inflows, said ICRA.