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Monetary Policy 2003: Key highlights - Views on News from Equitymaster
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  • Apr 29, 2002

    Monetary Policy 2003: Key highlights

    The Reserve Bank of India (RBI) has announced its monetary policy for the year 2002-03. Though the policy did not have any big ticket announcements like a huge CRR rate cut as in the mid-term monetary policy last year, a lot of structural issues have been given top priority this time around apart from RBI’s preference for a softer interest regime in the long run.

    Consider the stance of the current monetary policy first. "Under normal conditions and barring emergence of any adverse and unexpected developments in the various sectors of the economy, the overall stance of monetary policy for 2002-03 will be:

    • Provision of adequate liquidity to meet credit growth and support investment demand in the economy while continuing a vigil on movements in the price level

    • In line with the above, to continue the present stance on interest rates including preference for soft interest rates

    • To impart greater flexibility to the interest rate structure in the medium-term"

    Before going into the macro-economic environment, consider the measures that the RBI has undertaken in its policy. Towards its medium-term objective of bringing down Cash Reserve Ratio (CRR) to 3%, RBI has cut CRR by 50 basis points to 5% this time.

    Bank rates have however, been left unchanged at 6.5%. However, the apex bank has indicated that it might consider reducing bank rate by 50 basis points if liquidity and credit situation warrant such a move and inflation remains low. Reducing the CRR is expected to improve liquidity in the market, which is already is flush with funds and searching for lending avenues. Nevertheless, this is expected to benefit the government in a large way in achieving its borrowing programme. The proposed reduction in CRR cut is effective from June 15, 2002.

    There is some positive news for exporters as well. In order to make the interest rate even more competitive, ceiling rate on foreign currency loans for exporters is now reduced to LIBOR plus 0.75 percentage point from the earlier LIBOR plus 1.0 percentage point.

    Though bank rate in India is at comparatively lower levels, India Inc has been sighting higher cost of funds as the key obstacle for growth. While banks are allowed to lend at sub prime lending rates (PLR), only few corporates have access to such low cost funds. RBI has clearly addressed this area in the monetary policy. “As per the latest available information, spreads above PLR of some banks are substantial. In the present interest rate environment, it is not reasonable to keep very high spreads over PLR. Banks are, therefore, urged to review the present maximum spreads over PLR and reduce them wherever they are unreasonably high so that credit may be available to the borrowers at reasonable interest rates”

    Towards this, banks have been asked to present maximum spreads over PLR to the public. Besides, to bring in more transparency in the banking system, banks are requested to provide information on deposit rates for various maturities and effective annualised return to the depositor. Banks should provide information on maximum and minimum interest rates charged to their borrowers. Banks are urged to switch over to “all cost” concept for borrowers by explicitly declaring the processing charges, service charges, etc. to borrowers and announcing them publicly.

    Another significant move is the increase in stipulated limits for raising money from the international markets. At present, banks in India are allowed to borrow from and invest in the overseas market up to 15% of their unimpaired Tier I capital or US$ 10 million, whichever is higher. This has been raised to 25% for both investment and borrowing.

    Due to lack of asset creating avenues, banks generally park funds in call and money markets. The RBI has brought in fresh measures on this front as well. As per the new guidelines, scheduled commercial banks’ (SCB) daily lending in the call/notice money market is not to exceed 25% of their owned funds as at the end of March of the previous financial year. Similarly, SCB daily borrowings in the call/notice money market is not to exceed 100% of their owned funds or 2.0% of aggregate deposits as at the end of March of the previous financial year, whichever is higher. The existing borrowers and lenders are allowed to unwind their positions in excess of the prudential limits by the end of August 2002. This is expected to have a negative impact on banks, as they will be stressed to find avenues to park these funds.

    As regards the outlook for the economy, for the coming fiscal, RBI expects the Indian economy to grow by 6%-6.5% with inflation lower than 4%. The key factor, which is expected to drive economic growth in the coming fiscal, is the agricultural sector. Non-food credit is also estimated to grow by 15%-15.5%. RBI has also expressed its satisfaction on India’s external trade situation.

    Overall, RBI has continued with its long-term policy objective of a softer interest rate regime, ensuring stability and improving transparency in the financial system. Stability in the banking sector is essential for the economy to perform well. And the Monetary Policy 2002 has taken right stand in achieving its objective. Over to you Mr. Sinha!



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