Jalan, Jaswant, Pant Launch Busy Policy Season

Updated: Oct 30 2002, 05:30am hrs

RBI Boosts Liquidity To Spur Growth
Bank, Repos rates, CRR cut by 25 basis points each
Our Banking Bureau

Mumbai, October 29: Reserve Bank of India (RBI) governor Bimal Jalan on Tuesday unveiled his mid-term review of the monetary and credit policy for 2002-03, handing out a slew of rate cuts to create plentiful liquidity and make credit even more easily available in a bid to spur growth.

STABILITY AHEAD: RBI Governor Bimal Jalan meets bank chairmen to discuss the mid-term review of the monetary and credit policy for 2002-03 in Mumbai on Tuesday. He is flanked by deputy governors Vepa Kamesam (L) and Rakesh Mohan (R)
The measures announced include a 25 basis points cut in the Bank Rate making it the lowest since 1973 and effected identical cuts in the cash reserve ratio (CRR) and the repos rate.

While continuing with the overall stance of the policy announced in April this year, the central bank, however, made it amply clear that no useful purpose is likely to be served by a further reduction in the Bank Rate in the near future. Unless circumstances change, the policy bias in regard to the Bank Rate is to keep it stable at the present level until the end of the financial year, the RBI said in the policy. The Bank Rate has been cut to 6.25 per cent, CRR to 4.75 per cent and the repos rate to 5.50 per cent.

However, the RBI has left the savings bank deposit rate unchanged at four per cent. This is because the RBI feels that the effective interest rate in this case is around 3.4 per cent, which was low in any case. In an important move, the RBI has also revised downward the growth rate estimate for gross domestic product (GDP) at 5-5.5 per cent, down from 6-6.5 per cent initially seen. This has been done in view of the poor rainfall in some parts of the country. Reacting to the policy pronouncements, the ten-year yield curve fell to 6.96 per cent from the pre-policy position of 7.04 per cent. Select long-term government securities prices rose by Re 1, while those on medium-term rose 45 paise.

Addressing newspersons after announcing the policy, Dr Jalan said: Given the relatively benign inflation rate and the overall monetary and financial situation, we feel what we said in April this year holds true even now. The stance of the policy remains unchanged. We want to make liquidity plentiful and make credit easily available to help recovery and industrial growth. He said there were signs of a recovery as far as industrial growth went, but not of an order as strong as was expected earlier.

Among other measures announced by the RBI were the paying of interest on CRR balances maintained by banks on a monthly basis effective from April 2003. Banks have also been asked to maintain 80 per cent of their CRR balances on a daily basis. The RBI also said given the environment of low inflation, unreasonably wide spreads could affect the credit portfolio of banks and provide opportunity for non-transparency. Banks have been asked to review their prime lending rates (PLRs) and the spreads in PLRs and align the latter within reasonable limits.

The RBI also announced a number of initiatives to ease the flow of credit to the export sector. The ceiling rate of PLR plus 50 basis points on pre-shipment credit beyond 180 days and upto 270 days and post-shipment credit beyond 90 days and upto 180 days will be deregulated effective May 1, 2003. Banks will now have the freedom to charge PLR or sub-PLR rates on these credits. In the second phase the date of which is to be announced later it is to be deliberated whether ceiling rates on pre-shipment credit upto 180 days and post-shipment credit upto 90 days should also be discontinued to encourage greater competition in the interest of exports.

A relaxation has also been given in the repayment of export credit. It is now proposed that subject to a mutual agreement between the exporter and the banker, the repayment/prepayment of pre-shipment credit would henceforth be permitted.

For this purpose, balances held in the exporters EEFC account (export earners foreign currency) can also be used.

As part of the policy, Dr Jalan mentioned that there had been an improvement in the growth of non-food credit this year, reflective of the better outlook for industrial growth. Food credit, however, declined on account of lower procurement and higher offtake of foodgrain.

Referring to monetary developments, the governor said that on an annual basis, growth in money supply, net of merger, was in line with the projected trajectory and that the same applied for the growth in deposits as well. An important feature of monetary developments during the year, RBI said, has been the reduction in reserve money, despite the liquidity pressure emanating from an increase in the central banks foreign currency assets as also primary support to the governments borrowing programme.

On inflation, it was pointed out that in the current year, it is more evenly spread across major sub-groups. Annual inflation on a P-o-P basis was 2.8 per cent on October 12, 2002, as against three percent a year ago. While the deficiency in rainfall caused pressure on the prices of many agricultural commodities, the domestic inflation outlook still looks comfortable and the inflation rate is likely to be around four per cent which is in line with the expectations in the policy statement of 2002-03, RBI said.

In the case of regional rural banks (RRBs), their statutory liquidity ratio (SLR) holdings, beyond the end of the current fiscal, may be allowed to be retained till maturity.

In case these banks have not achieved the minimum SLR level of 25 per cent by that time, these deposits may be converted into government securities. Although deposits with sponsor banks contracted before April 30, 2002, will be reckoned for SLR till maturity, RRBs have been advised to achieve the 25 per cent SLR target out of the maturity proceeds of such deposits with sponsor banks, as well as their incremental public deposits at the earliest.

RBI also reiterated that duality of control in the case of urban cooperative banks should be done away with. In case immediate measures are not taken to remove this duality, it would be difficult to make the supervisory system effective, the central bank has said.