The RBI’s monetary and credit policy announced on Friday has heralded a big change for debt-oriented mutual fund schemes. The clarification on regulatory framework for money market funds will remove the dichotomy between regulation of similar types of funds by RBI as well as SEBI.

Extension of cheque-writing facility for gilt funds and liquid funds which invest not less than 80 per cent of corpus in money market instruments will give a big boost to these funds and enhance trading activity in money market securities, in the process increasing retail participation in money market instruments.

Another important step forward is the permission given to mutual funds to enter into forward rate agreements and interest rate swaps with banks, primary dealers and financial institutions. Fund managers, especially of debt-oriented funds, will now be able to take advantage of movements in interest rates. This will help protect value for investors in debt-oriented funds. The forecasts mentioned in RBI’s April ’99 policy statement have broadly come true. RBI has been successful in maintaining liquidity along with stability of interest rates.

RBI will continue its emphasis on achieving growth with financial stability. Thus, CRR has been cut by further 1 percentage point. RBI’s review also underscores the urgent need to bring down the interest rates on contractual savings. This shows RBI’s preference for softening of interest rates. While lending rates may not fall significantly, the reference to the freedom given to banks in setting deposit rates indicates that banks may have to revise their interest rate structure downwards over a period of time. Overall, the RBI Governor has indeed given impetus for growth and the country is well prepared to enter the Y2K with confidence.