Mumbai, Nov 9: The Reserve Bank of India (RBI) will introduce liquidity adjustment facility (LAF) and provide for electronic dealing system by March 1999. This was disclosed by the deputy governor of RBI, YV Reddy at a lecture organised by Indian Merchant Chamber on `mid-term review of the monetary and credit policy' held on Monday. The RBI had recently said in its mid-term credit policy that the apex bank has agreed to the Narasimham Committee recommendation that LAF should be introduced so that the RBI can support the market in a better manner. The LAF will be operated by way of repos and will provide enough room for other players in the market.In the credit policy the RBI had said that due to technical and procedural constraints the LAF cannot be introduced immediately.
According to him, in the last few weeks the short-term interest rates have firmed up whereas there has been marginal increase in the long-term interest rates whereas deposit rates and prime lending rates have remained stable. "Interestrates are further expected to remain stable at these levels for some time at the time when inflation is inching up," he said.
He further said that RBI has successfully completed 90 per cent of its gross domestic borrowing programme and also kept the interest rates stable by privately placing gilts during volatile market conditions.
While providing a rationale for tightening the prudential norms, he said, "high prudential requirement will put a pressure on banks, increase stability and efficiency in the banking system, ensure capital augmentation and improve banks credit portfolios."
He added," The high prudential norms should be seen with a marginally higher growth rate of 7-8 per cent and credit growth of 15-20 per cent".
According to him, the main objective of the central bank currently is to reduce fiscal deficit and ensure GDP growth. He said that RBI expect the GDP growth at 6 per cent for the current fiscal whereas the National Council of Economic Research has predicted the GDP growth rate at5.7 per cent. The industrial growth is expected to be around 6 per cent considering the lacklustre capital market and recessionary trends in the industrial sector which is undergoing major restructuring. He said,"taking into account of the comfortable money supply in the system and easy liquidity, there will not be any increase in the credit to central government through RBI."
Stressing the need to control the fiscal deficit he said that if fiscal deficit is kept at the current level then it will not put pressure on the central bank. While providing a rationale for assigning risk weightage to government guaranteed advances, he said that the move will restore the credibility of some state governments. "The demand for providing some kind of a supportive framework was put forth by banks as a few state government have in the past not honoured guarantees given by them against advances provided by banks."
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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