The monetary policy measures taken by Reserve Bank of India have kept inflation expectations down, which contributed to corporate performance, RBI Deputy Governor Rakesh Mohan said on Friday.

“Monetary policy changes... reforms... in terms of instruments and also use of some pre-emptive monetary policy measures as and when necessary... seem to indicate that inflation has come down and more importantly, inflation expectations have come down and seem to remain well-anchored,” he said.

This has led to significant decline in nominal and real interest rates and helped contribute to corporate performance of India Inc, Mr Mohan said at the Ficci-IBA Global Banking Conference here.

Noise & discomfort
“Among very important causes for improved corporate performance in terms of profitability and growth is the handle we have been able to get on inflation expectations through monetary policy action,” he said, while recalling there was huge noise and discomfort among public and the corporate sector when inflation was over six per cent late last year and early this year. Inflation expectations are clearly down and the apex bank would like it controlled around 4-4.5 per cent level in the medium term, Mr Mohan said.

“In terms of corporate profitability, lower interest cost... interest payment of corporate sector as a proportion of gross profits was just over 50 per cent in the 1990s, which was now down to about 13 per cent,” he noted.

Bank credit revival
He maintained that consistent and stable monetary policy with greater attention to price stability has provided confidence to market players, corporate sector and households that inflation will be down and market will have more stable and lower interest rates.

Mr Mohan said while there was a revival of bank credit following reforms in the financial sector, much work remained to be done.

“The share of bank credit to GDP in 2002 was 27 per cent which has increased to 51 per cent in 2007 but credit penetration remains still low and we have still a long way to go in terms of bank penetration, credit penetration and financial inclusion,” he observed.

He said asset quality for banks was high and there has been a reduction in non-performing assets. “The gross NPAs have dropped from 15.7 per cent to 3.3 per cent while the net NPAs are down from 8.1 per cent to 1.1 per cent. We are at the threshold of approaching international standards of NPAs.”

Mr Mohan attributed this to the improvement in the structure of the financial system through increased competition and consistent improvement through prudential regulation.

More vigilant
Meanwhile, RBI Governor Y V Reddy, said RBI is more vigilant than ever in checking inflation without choking growth — an uphill task that has been compounded by heightened global financial uncertainties and rising prices of crude oil and farm produce, its Governor Y V Reddy said on Friday.

“The policy challenge for RBI, now, is to manage the current transition to a higher growth path while containing inflationary pressures and focusing on financial stability,” he said, addressing bankers in Mexico.

But Mr Reddy was pragmatic when he said India cannot remain immune to global inflationary pressures, brought about by global developments — rising oil prices for instance.