Just A Few Spices Added

Updated: Oct 30 2002, 05:30am hrs
The credit policy announced by the Governor continues to lay emphasis on softening of interest rates, provision for adequate liquidity and to meet the credit growth, improving the credit delivery system and investment of banks, so as to impart greater flexibility to interest rate structure in the medium term. Series of measures have been announced for improvising technology and institutional infrastructure of the financial reforms.

KV Krishnamurthy,
CMD Bank of India
The mid-term review of monetary and credit policy has not sprung any surprise and has more or less followed the predictable path. The business community has been clamouring for Bank Rate cut, a wish, which has been fulfilled by the Governor.

It is in tandem with the fall in market interest rates in the last few months. A token reduction of 0.25 per cent in Bank Rate is more symbolic of the interest rate direction, which the RBI would like to see, than anything else. The reduction in Repo Rate is a logical corollary to the Bank Rate cut.

It may be time for some of the Banks to review their lending rates and bring down the PLR. Cut in CRR by a 0.25 percentage point is yet another step of convergence towards minimum statutory rate of 3.0 per cent. The excess inflow into the system has been partially neutralised by increasing the minimum level of CRR maintenance to 80 per cent on all days during the reporting fortnight.

The two measures are aimed at bringing down the interest rates. But with RBIs Tax-free Bond ruling at 7 per cent and interest on other Small Savings and Provident Fund interest rates remaining relatively high, the scope for the banks to reduce the deposit rates any further will be rather limited. To the extent, the cost of deposits may not come down and consequently there will be pressure on margins.

The Governor has once again reiterated on the need to provide the option of flexible rate deposit products along with fixed rate deposit schemes. Some banks like ours have been providing flexible rate deposit schemes to suit certain class of customers. However, the success of extending similar product to a larger section of depositors will much depend upon the availability of a credible benchmark.

The preferential treatment to co-operative banks and RRBs to offer higher rates on savings bank deposits and also pay interest on current deposits to their customers has been withdrawn.

This will see some flight of deposits to public sector and other scheduled banks, given the relative safety factor.

To sum up, the Policy is just a review

or progress report of various measures relating to the market mechanism and financial sector reforms that are taking place, with just a few spices added here and there so that what has been dished out does not taste bland.