RBI Cuts CRR By 50 bps, Puts Cap On Banks Call Lending, Borrowing

Mumbai, April 29: | Updated: Apr 30 2002, 05:30am hrs
The Reserve Bank of India reduced its cash reserve ratio (CRR) by 50 basis points to five per cent from the existing 5.5 per cent. Also in a smart, but expected move, along with the CRR cut, RBI put a cap on call money borrowings and lendings by market players across the board.

The RBI said the lending in the call money market, on a daily basis, should not exceed 25 per cent of their owned funds (paid-up capital plus reserves) as at the end of March of the last fiscal.

Salient Features Of Monetary And Credit Policy For The Year 2002-03

Growth rate in 2002-03 projected at 6.0 to 6.5 per cent. Inflation to remain low
Monetary conditions and liquidity position highly comfortable
RBI to provide adequate liquidity to meet credit growth and support investment demand
Soft interest rate regime to continue and greater flexibility to interest rate structure in the medium-term
Further cut in CRR by 50 basis points
Bank Rate may be cut by upto 50 basis points depending on monetary developments - No timing fixed yet
No change in interest rate on Savings Account
Interest rate on export credit in foreign currency lowered
Abolition of minimum lending rate for Cooperative Banks
Banks to declare maximum and minimum lending rates
Banks should provide information on deposit rates on various maturities and effective annualised return to depositors
Facilities for Small Scale Industries liberalised
Further measures to improve credit delivery mechanism to priority sector
Measures to improve flow of credit to housing sector.
Further measures to develop Government Securities market
Access to call money market to be regulated
CDs to be issued in demat form
More prudential measures to bring financial stability.
Measures to improve technology - EFT facilities to be expanded
Real Time Gross Settlement System to be ready for testing in a year’s time
Submission of returns by NBFCs: RBI to penalise delays

The RBI also said that borrowings by scheduled commercial banks in the call money market, on a daily basis should not exceed 100 per cent of their owned funds or two per cent of aggregate deposits as at the end of March of the previous financial year, whichever is higher.

In order to ensure that scheduled commercial banks do not face any disruption in their asset-liability mismatch in adjusting to this stipulation, the existing borrowers and lenders should unwind their positions in excess of the prudential limits by the end of August 2002.

The cap on call is a move by the central bank towards restricting the extent of borrowing in the call money market. At present most market players fund their investment via the call money market and the RBI wants them to limit that, said IndusInd Banks senior vice president, head treasury, Sharukh Wadia.

Said IDBI Banks country head-treasury, Janak Desai: The rationalisation in the level of permitted call borrowings will also significantly reduce the irrational exuberance that the government securities (G-Secs) market has been witness to. Trimming of the large surplus positions on G-Secs securities in the banking system will result in the bond markets remaining subdued for some time to come until structural corrections required in the system are largely addressed.

Said Credence Analytics director Shefali Sachdev: The policy shows that RBI is concerned about the market risk regarding the banks holding of G-Secs securities. RBI is also concerned about the low yield of G-Secs. The credit policy gives a clear-cut signal to banks that they should have some kind of cushion on G-Secs investments.

RBI restricts bank and non-bank players from accessing the call market for their borrowing requirements. This will help them to sort out asset-liability mismatches.

A rough estimate shows that the borrowing from the call market will shrink by Rs 7,000 crore on a daily basis. Currently, dependence on call borrowing is around Rs 20,000-25,000 crore.

The restrictions have been placed on the call money market borrowings and lendings are positive measure for money market and should reduce volatility in the interest rates, said ICICI Banks senior vice president & chief dealer domestic treasury, Narendra Gupta.