M A I N   N E W S

RBI unveils credit policy

MUMBAI, April 27 (PTI) — The Monetary and Credit Policy for the year 2000-01, unveiled by RBI today aims at further strengthening and improving the financial system of the country by proposing a slew of liberalisation measures for the money markets and banks.

RBI has decided to progressively implement in stages, a full-fledged liquidity adjustment facility (LAF) to be operated through repo and reverse repos in order to set a corridor for money market interest rates.

In the proposed LAF, the quantum of adjustment as also the rates would be flexible, responding immediately to the needs of the system, RBI Governor Bimal Jalan said in his address to the Chief Executives of scheduled commercial banks.

It is expected that the LAF would also help the short term money market interest rates to move within a corridor and impart greater stability, thus facilitating emergence of a short term rupee yield curve, he said.

“There is a case for the scheme of export credit refinance to continue for some more time, under the present circumstances, given certain domestic rigidities in the interest rate structure and desirability of giving maximum support to exporters,” he observed.

In order to provide more flexibility for pricing of rupee interest rate derivatives and to facilitate integration between money and foreign exchange markets, the use of “interest rates implied in the forex forward markets” as a benchmark would be permitted in addition to the existing domestic money and debt market rates.

The bank has reduced minimum maturity for Certificates of Deposit (CDs) to 15 days from three months to bring it on par with other instruments like CP (commercial paper) and term deposits. The minimum period of transferability of CDs have also been reduced to 15 days.

The facility to non-bank entities to rout transactions through PDs has been extended up to December 2000, RBI said adding that steps would be initiated to extend repo facility to them through Subsidiary General Ledger (SGL) II accounts.

The non-bank entities, including mutual funds which are holding both current and SGL accounts with RBI, would now be able to borrow and lend in the repo market.

The bank has also proposed to review and evolve a time-bound programme of withdrawing permission to these entities for lending in the call/notice money market, coinciding with the development of the repo market.

The apex bank has decided to modify guidelines for issue of commercial paper which are expected to provide more liquidity and depth to the product.

With a view to provide further flexibility to the banks and enabling them to choose an optimum strategy of holding reserves, RBI has decided to reduce the requirement of a minimum of 85 per cent of CRR balances to 65 per cent with effect from May 6 ,2000.

The bank expects this to result in a smoother liquidity adjustment between surplus and deficit units and enable better cash management by banks.