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Highlights of mid-term policy 2004 - Views on News from Equitymaster
 
 
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  • Nov 3, 2003

    Highlights of mid-term policy 2004

    In view of expectations of higher GDP growth, benign inflation outlook, subdued growth in money supply and stronger capital flows, the Reserve Bank Of India (RBI) has in its mid-term review of monetary and credit policy reiterated its overall stance stated in April '03. The stance as stated by the RBI is as follows:

    1. Provision of adequate liquidity to meet credit growth and support investment demand with a vigil on the price level with preference for soft and flexible interest rate environment.
    2. Focus on implementation with the objective of facilitating ease of transactions by the common persons.
    3. Support economic growth consistent with stability by strengthening of institutional capacity through a consultative process in the medium-term.

    In April '03, the RBI had reduced the bank rate by 25 basis points to 6% and it was expected to remain unchanged unless there was a change in the domestic and international circumstances. In view of the above, the RBI has decided in the mid term monetary policy 2003-04 to retain the bank rate at 6%. As for the CRR, although the RBI is committed to its medium-term objective of reducing the CRR to the statutory minimum level of 3%, however in view of the existing high liquidity position, RBI has decided to keep the CRR unchanged at the current 4.5%. In respect of PLR, the RBI has recommended that The Indian Bank Association (IBA) will advise the banks on deciding the benchmark PLR.

    In order to improve the flow of credit to small-scale industries (SSI), the RBI has taken various initiatives like increasing the loan limit for dispensation of collateral requirement from Rs 15 lakh to Rs 25 lakh depending upon the track record and the financial position of the SSI unit. This apart, the RBI has also proposed to set up a working group on flow of credit to SSI sector as well as an advisory committee on flow of credit to agriculture and related activities.

    The RBI has upped its outlook for 2003-04 and has projected a GDP growth rate of 6.5% - 7.0% as compared to the 6% projection made in April '03. The inflation rate projection has been lowered to 4.0% - 4.5% as compared to the April '03 projection of 5.0% - 5.5%.

    In the statement, the RBI has also indicated that though it is happy with the growth in housing and other retail loans, interest rates for smaller corporates and SSIs have not reached their desired level, despite the soft interest rate bias. The future focus is likely to be on the lower interest rate benefits reaching these smaller undertakings.

    By maintaining the bank rate at current levels, the RBI has sent out a signal that although it is open to a soft interest rate bias, it will continue to pursue this policy keeping the level of government fiscal deficit and the inflation trends in mind. The gross fiscal deficit of the government is up 40% YoY in 1HFY04. The RBI has also indicated of a revival in the economic fortunes of the global economy, and the move to maintain status quo indicates a cautionary stance from the apex bank. From here on, investors and loan seekers both need to tone down their interest rate dip expectations.

    For more on mid-term review of the monetory policy 2003-2004 Click here.

     

     

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