The review has come out more or less on expected lines, except on the issue of maintaining status quo in Bank Rate, contrary to market expectations of a 50 basis points cut.
Otherwise, there were no major expectation of an immediate cut in the CRR and on possible changes in repo rate. The permission of the sale of government securities already contracted for purchase in the case of it being guaranteed by an approved central counterparty is a good news. The market might like to interpret it as indications for the possibility of future short-selling with adequate legal and regulatory framework in place. The debt market also welcomes the directive that a fully functional RTGS is expected to be made operational by June 2004 and the RBIs support in providing collateralised intra-day liquidity support to the participants due to the likely increase in the requirement of intra-day funds.
The upward revision of GDP growth to 6.5-7 per cent with an upward bias and the downward revision of inflation rate by hundred basis points to 4.0-4.5 per cent with a possible downward bias has been as per expectations. A significant downward revision leaves open the possibility of a downward revision in the interest rate structure.
Looking at the flush of liquidity in the market, no significant impact is anticipated from the change in the apportionment of normal and back-stop standing facilities to a ratio of one-third to two-third (33:67) instead of the present one-half each and the issue of not allowing non-bank participants to lend on average (in a reporting fortnight) more than 60 per cent of their daily lending in call/notice money market in 2000-01. However, effective February 7, 2004, the restriction on PDs ability to borrow on an average (in reporting fortnight) up to 200 per cent of their net worth against no such restrictions at present in the absence a well developed CBLO, term money and repo market can create some problems for PDs. Though RBIs assurance for a reasonable dispensation with full justification for extension of period for PDs having genuine difficulties in adhering to the above schedule, remains a redeeming factor.
The author is the Managing Director, STCI