M A I N   N E W S

RBI cuts bank rate, CRR

Mumbai, October 29
The Reserve Bank of India today lowered its GDP growth projection by 1 per cent for this fiscal and put more liquidity in the system by announcing a 0.25 per cent cut each in the bank rate, cash reserve ratio and the repo rate.

Releasing the mid-term review of monetary and credit policy here, RBI Governor Bimal Jalan said it aimed at softening the interest rate structure, increasing the operational efficiency of the banking system and strengthening the prudential and supervisory norms.

The RBI cut the bank rate to 6.25 per cent from 6.50 per cent, the CRR to 4.75 per cent from 5 per cent and the repo rate to 5.5 per cent from 5.75 per cent. While the repo rate, the short-term benchmark, will be effective from October 30, the CRR, the proportion of deposits that banks must keep in cash with the RBI, will comes into effect from November 16.

The apex bank lowered its forecast for the GDP growth to 5-5.5 per cent from 6.-6.5 per cent, but maintained an inflation forecast of around 4 per cent for the year.

In an immediate response to the policy, a section of the bankers here opined that the fresh round of monetary measures would make more funds available for lending in anticipation of a revival in the industrial sector. They felt that the credit off-take would be led by the retail segment.

The RBI has indicated pickup in the industrial sector and has made available another Rs 3,000 crore in the system by the reduction in the CRR.

However, Corporation Bank CMD K. Cherian Varghese said, ‘’The additional availability of credit in the system might not solve the problem of low credit off-take by the industrial sector.’’

‘’The cut in key interest rates may lead to a reduction in the prime lending rate (PLR) but the concept has lost its relevance as banks are now lending below the PLR’’, Bank of Baroda CMD P.S. Shenoy, said here.

On legal reforms, Dr Jalan said it was important for the RBI to have sufficient flexibility in orienting the operative, regulatory, and supervisory framework appropriately to keep pace with the economic development

Accordingly, the RBI today proposed various amendments to the existing Acts, in order to provide more flexibility in day-to-day operations.

On co-operative banks, the RBI Governor said it would be difficult to make a supervisory system for such banks effective, due to dual control. The RBI would do its best in implementing the final decision of the government in this regard.

With a view to encouraging competition among banks and also to increase flow of credit to the export sector, the RBI Governor said the ceiling rate of the PLR plus 0.5 percentage point on pre-shipment credit beyond 180 days and up to 270 days and post-shipment credit beyond 90 days and up to 180 days, would be deregulated with effect from May 1, 2003. UNI

Highlights

• GDP growth lowered to 5-5.5 per cent from 6-6.5 pc
  
  
• Bank rate reduced by 0.25 per cent to 6.25 per cent, effective from close of business today, the lowest since 1973.
  
  
• Cash reserve ratio reduced by 0.25 per cent to 4.75 per cent, effective from fortnight beginning November 16.
  
  
• Agriculture GDP expected to decline around 1.5 per cent.
  
  
• Repo rate reduced by 25 basis points to 5.5 per cent, effective tomorrow.
  
  
• Inflation to remain benign around 4 per cent despite drought and pressures on oil prices.
  
  
• Substantial increase in flow of bank credit to industries. Upturn in industrial production and buoyancy in exports to sustain growth.
  
  
• Money supply (M3) contained within projected trajectory of 14 per cent.
  
  
• Decline in reserve money despite large increase in foreign exchange reserves and significant primary support to government borrowing programme.