The mid term monetary and credit policy of the Reserve Bank of India (RBI) no longer contains surprises and shocks; complements the ongoing consultation, systemic changes and process changes brought-in by the Governor. In spite of this, there was immense interest in the market about the steps and measures that would be announced in the Monetary Policy. The press and media had been giving wide coverage to the issues of interest to the Bankers and the other market players as also to all those who are related to the financial sector.
CMD Bank of Baroda
The issues basically related to cut in bank rate, reduction in CRR, scaling down of the repo rate and reverse repo rate, relaxation in capital market exposure norms for banks, certain guidelines for banks for issuing long term bonds for asset-liability management, broad framework for implementation of Basel Committee Recommendations on Capital Adequacy etc. The banks themselves have made certain suggestions touching upon the above aspects, as also such aspects as improvements in Floating Interest Rate System, lowering risk weights in respect of certain assets while calculating capital adequacy requirement, allowing banks to borrow from/invest in the overseas market to the extent of 50 per cent of their unimpaired Tire I Capital within the open position limit and Gap limits, treating investment fluctuation reserve as a component of Tier I Capital etc.
In the backdrop of what has been said above, the policy measures announced by the RBI could be said to be in perfect order meeting the market expectations. The RBI not only met expectations of the bankers, but also accepted a number of suggestions made by them. The reduction in Bank Rate from 6.50 per cent to 6.25 per cent is an extremely welcome measure.
The RBI Governor can draw satisfaction from the fact that the softer interest rate regime has finally percolated to the other stratas, and a AAA corporate would now be in a position to raise 5 years funds at even lower than 7 per cent and upto the new Bank rate of 6.25 per cent.
The cut in repos rate from 5.75 per cent per cent to 5.50 per cent is much in tune with the market expectations.