The reduction in cash reserve ratio (CRR) will be contingent upon liquidity conditions and the need for using it as an instrument of sterilisation along with other instruments.
?The challenge before the Reserve Bank of India (RBI) now is to reduce the CRR and SLR stipulations, as we go along,?? said YV Reddy, governor, RBI, while delivering his address at the National Institute of Public Finance and Policy (NIPFP)
Explaining further, Reddy said, the reduction in SLR will primarily be governed by the fiscal situation of the government.
?The issue is not one of desirable destination but one of negotiating the path in an optimal way. RBI has two options for proceeding in this regard. Either we accept the fiscal situation and wait for it to improve, to effect any further reductions in SLR or reduce prescriptions gradually consistent with fiscal situation and market development. So that is the type of choices we are facing at this juncture and RBI prefers to assess the fiscal situation and proceed with the reductions in a cautious manner,? he said. Also, according to Reddy, one of the factors imparting rigidity to the interest rate structure in India is the administered interest rates, particularly on small saving instruments.
In this context, administered interest rates fixed by the government on a number of small saving schemes and provident funds are of special relevance as they have generally offered a rate different from those on corresponding instruments available in the market and in some cases along with tax incentives.
Depending on how it is calculated, on both the savings and the lending sides, the administered structure of interest rate would apply to about 25- 40 %, he said.
?With statutory liquidity ratio prescription of 25% an important issue that remains is that there is a no genuine market for government securities in India,?? he said
The impact of the monetary policy depends not only on the actions of the monetary authority, but also on other public policy postures. This certainly complicates monetary management.
Of course, the issue of conflict of interest in public sector banking and government ownership is yet another issue.
The issue of conflict of interest in private sector banks arises when the owner of the bank borrows from his own bank. The single largest source of borrowing for the government being the government-owned banks themselves, this conflict is rather apparent, he said.