X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Credit Policy: Bimal Jalan's dream policy - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Oct 22, 2001

    Credit Policy: Bimal Jalan's dream policy

    Let's get into the gut of the just announced busy period monetary policy that has sent all banking stocks sky rocketing and has much of the ingredients to be termed as a dream policy.

    For starters, the Central Bank has reduced the cash reserves ratio (CRR) to be maintained by the banking sector by a whopping 2% over a two-phase schedule. The CRR will be reduced to 5.5% from the current 7.5% with the first cut coming into effect the fortnight beginning November 3, 2001. The second cut of 0.25% will be effective the fortnight ending December 29, 2001. CRR is maintained with the Reserve Bank on Net Demand & Time Liabilities (NDTL) of the bank. These two cuts are expected to increase money supply in the banking system by Rs 60 bn and Rs 20 bn respectively.

    Banks are likely to be flush with funds, not only removing any lending constraints but also putting pressure on banks to increase fund based activity. This announcement has raised hopes of turning around a moribund capital investment environment, which could lead to enhanced economic growth in the second half of the current fiscal.

    However, the twin effect of the banking sector investing in Government securities (G-Secs) to keep non-performing asset (NPA) levels under check and the Central Government expected to increase market borrowing to fund a higher deficit could crowd out private investments, as has occurred in the past. Commercial bank investments in G-Secs are currently ruling at 36.3% of NDTL. As per the statutory liquidity ratio (SLR) stipulations, commercial banks are expected to park 25% of their NDTL in SLR approved securities. Scaling down of G-Sec investments to SLR stipulated levels would unlock an additional Rs 403 bn in the banking system. As of August '01, the Government has exhausted 50% of its budgeted borrowing programme. Assuming the borrowing programme is uniform across the year, the Government is likely to exceed the borrowing target by 8.3%.

    At the same time all other liabilities that were exempted for the purpose of calculating CRR levels will be withdrawn except for inter-bank liabilities with effect from November 3, 2001. This move, to a certain extent, will compensate for the reduced CRR rates. The RBI expects these moves to facilitate the development of a short-term yield curve, money markets (short-term fixed income markets), increase lending resources with banks and enhance the functionality of open market operations for controlling monetary policy.

    Between the annual policy of FY02 and the mid-term policy, the RBI had cut bank rate by 50 basis points to 7%. The bank rate has been further brought down to 6.5%. Bank rate is the rate at which commercial banks can borrow from RBI. Another booster is the interest paid on CRR balance maintained with the RBI. In the annual policy the Central Bank had increased the interest rate on these cash balances by 200 basis points from 4%. These cash balance will now attract the bank rate of interest (6.5%).

    As part of the open market operations the Central Bank is likely to extend the repo facility to 14 days. This is on the back of the successful introduction of the liquidity adjustment facility (LAF) in June 2000 as a flexible and effective tool for equilibrating liquidity in the banking system.

    Other highlights to follow…

     

     

    Equitymaster requests your view! Post a comment on "Credit Policy: Bimal Jalan's dream policy". Click here!

      
     

    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS