In its Annual Report for 2001-02 released on Friday, RBI said: Monetary policy seems to be approaching a zone of ineffectiveness in terms of stimulating demand through interest rate adjustments and there is very little room for manoeuvre for fiscal easing.
Here, it may be pertinent to note that last fiscal, RBI reduced the Bank Rate by a total of 100 basis points (bps), but this seemingly did not have much impact on the credit offtake front. To a large extent, the yield on 10-year government securities declined by as much as 287 bps. The repos rate and call rates also declined significantly.
On the other hand, RBI has reiterated its softer bias for interest rates. Unless circumstances change unexpectedly, RBI will continue to maintain current interest rate environment with a bias towards softer interest rate regime in the medium term, RBI stated. It also pointed out that the long-term objective would be towards the realignment of interest rates of all types of debt instruments, both the government and private sector, within a narrow band.
But more importantly, RBI has pointed out the importance of fiscal and monetary policy interface. Conduct of monetary policy without sensitivity to fiscal realities will be counter-productive. In this regard, the issue of optimal degree of monetisation of the fiscal deficit assumes importance, RBI said.
The Report added that co-ordination between fiscal and monetary policies has to be considered from several angles. Once a final decision is taken on the fiscal deficit by the government, the RBIs endeavour has been to ensure that it is financed in a way that is least disruptive in the context of macro-economic stability and growth.
The RBI had in its latest monetary and credit policy placed a 6-6.50 per cent real GDP growth for the fiscal 2002-03. The rate of inflation is assumed to be slightly lower than 4 per cent.
The projected expansion in broad money (M3) and in aggregate deposits for 2002-03 is 14 per cent each and 15-15.50 per cent for non-food credit.
The RBI proposes to ensure that all legitimate requirements for credit are met during this time consistent with the objective of price stability.
Towards this end, RBI will continue its policy of active management of liquidity using the policy instruments at its disposal, whenever required, the report said.
It will continue to bring about development and smooth functioning of the financial market and pursue further financial sector reforms towards achieving a greater degree of efficiency, transparency and financial stability, the report added.