The underlying message is clear: there is only so much that a Monetary Policy can do in warding-off recession or promoting economic recovery.
RBI has recognised the various reasons for the relatively lesser reduction in interest rates to borrowers, having regard to the other parameters such as Government securities yield curve shifts, inflation, reduction in administered interest rates and CRR cuts.
The Policy makes an attempt to address some of these structural issues that render the interest rate structure inflexible. The introduction of floating rate deposits will help in reducing the rigidity in the interest rate structure.
Banks have been asked to declare “all-in-cost” of loans to borrowers, which will impart a greater transparency to the process, especially in the retail segment.
Although there were some expectations that the central bank will bring about a reduction in the savings deposits rate, RBI has justified status quo as households hold almost 80per cent of these deposits.
RBI has also urged banks to reduce spreads over PLR wherever they are unreasonably high; to what extent this can be achieved is uncertain.
Other credit-related measures in the Policy are aimed at easing credit access for priority sector constituents including the housing finance sector.
The markets were expecting CRR cuts and 50 bp is in line with the expectations. However, the market was also looking forward to a fixed timetable for the reduction to 3 per cent target CRR level set by RBI.
It was widely expected that some prudential norms will be announced vis-…-vis participation in the call money market participation.
The stipulated cap, linked to 100 per cent of Tier-I capital from the banks’ perspective is restrictive and contrary to the spirit of deregulation. Large foreign banks with demonstrated and increasing commitment to India stand to be penalised by this provision.
The participation of non-bank institutions in the call money market has been reduced by 25 per cent of their lending levels in 2000-01.
The Policy measures announced by RBI will support investment demand in the economy but the crucial question upper-most on everybody’s mind is how will the additional demand be created