The mid-term review of the monetary and credit policy (policy) for 1999-2000 provides assurance that the economy is on the right track in respect of major parameters such as agricultural & industrial output, inflation foreign exchange reserves and credit growth and is set to achieve the targeted GDP growth of 6-6.5 per cent. It reiterates that the overall stance of the policy will continue to be provision of reasonable liquidity, stable interest rates (with preference for softening), orderly development of markets and financial stability.

Many of the measures announced are pro-active and will have a positive impact. While the measures taken by the RBI in the recent past have been very successful in relation to the objectives of the policy, there will remain some structural issues which need to be addressed. The following views relate to policy contents and their impact in certain areas:

Macroeconomic environment
The policy indicates a high level of confidence in achieving the desired level of GDP growth. This is based on the assumption that the agricultural production will be higher than in the previous year and that there are early signs of recovery in sectors such as cement and steel, which will gain momentum during the next few months.

The major area of concern, however, continues to be the quantum of Government borrowings remaining to be completed. While over 80 per cent of the budgeted gross borrowings have been completed, the deteriorating fiscal position and requirements arising out of the Kargil conflict will require additional borrowing. The policy also indicates that the central Government’s gross fiscal deficit as a percentage of total budgeted deficit is higher till August ’99 than in the same period in the previous year. There is an urgent need to reduce the deficit by increasing revenues and curtailing expenditure through appropriate policies.

Liquidity and interest rates
The proposed reduction in CRR by 1 per cent and withdrawal of incremental CRR applicable on FCNR (B) deposits are welcome announcements. However, there is a need to ensure that the liquidity released is available to industry and not diverted to government borrowing. It is also necessary that CRR is further reduced to 3 per cent progressively as recommended by the Tarapore Committee.

The proposal to introduce a time lag of two weeks in meeting CRR requirements will help smoothen the volatility in call rates. The abolition of import finance surcharge is another welcome measure.

The policy indicates that there are structural and other constraints in bringing about greater flexibility in interest rates. However, no mention is made of long-term measures to solve these constraints.It is necessary that the issues relating to capital account convertibility and structural limitations in the banking system, including competition with mutual funds, are addressed so that improvements in the cost of funds and flow of money to desired channels are achieved.

Market developments
A few measures announced in the policy are note-worthy. The policy provides that banks can lend below PLR on discounting of bills. This should facilitate development of market for financing backed by documents and could develop into an attractive source of funds for many corporates. The release of data on a daily basis on market volume and other relevant data to provide transparency and uniform flow to market participants will facilitate smooth functioning and minimise volatility in the markets. Other welcome measures include permission of mutual funds to undertake FRAs/IRS and facilitating cheque writing to certain categories of mutual funds.

Infrastructure and export financing
The policy provides thrust to housing sector by providing for lending below PLR in certain cases and changes in the definition of priority sector lending to include indirect lending for housing. These changes should result in increased flow of money to this sector. Interest rates for loans between Rs 5 and 10 lakhs could be lowered. The needs of other infrastructure sectors are not addressed in the policy.