Mumbai, April 29
The Reserve Bank of India (RBI) today announced a cut of 25 basis points each in the bank rate and the cash reserve ratio (CRR) to maintain its monetary policy stance of softening the interest rate environment and providing adequate liquidity.The RBI, in its Monetary and Credit Policy, slashed the bank rate to 6 per cent from 6.25 per cent with effect from the close of banking hours today, ensuring a liquidity of Rs 3,000 crore into the financial system.
The CRR cut from 4.75 per cent to 4.50 per cent would be effective from the fortnight beginning June 14.
It said there may not be a significant
potential for any further sizeable downward movement in interest rates in view of several structural constraints.
In the policy, the RBI said structural factors such as food procurement prices and food subsidies determined by the government, which contributes to continuing fiscal deficit, were generally higher in the country than those in the industrial or fast-growing market economies.
These factors imparted an upward bias to sustained price increases from year to year, particularly during the upward phase of the business cycle.
Efforts should be made to
reduce the impact of these factors to facilitate greater downward flexibility and a sustainable soft interest rate climate, it said.
In this context, the RBI asked commercial banks to price their loan products and fix the prime lending rate (PLR) in a very transparent manner to truly reflect the actual cost of funds and the profit margin thereupon.
On priority sector lending, the RBI announced the liberalisation of bank credit for drip irrigation and agricultural machinery up to Rs 20 lakh and the housing sector up to Rs 10 lakh in rural and semi-urban areas.
Besides providing further relief of interest rate on loans for drought-affected farmers, it enhanced the scope of definition of infrastructure lending, relaxing the prudential single borrower exposure limit to 20 per cent of capital fund and assigning a confessional risk weight of 50 per cent on investment in securitised paper pertained to an infrastructure facility.
The RBI also made an effort to transform the interbank call money market into a pure interbank market by gradually phasing out non-bank participation.
Starting the fortnight beginning from June 14, the non-bank participants would be allowed to lend, on average in a reporting fortnight, up to 75 per cent of their average daily lending in the market during 2000-01.
From fortnight beginning May 3, it would be mandatory for all members to report all their call market deals to the Negotiated Dealing System (NDS).
Deals done outside NDS should be reported within 15 minutes on the NDS, irrespective of the size of the deal.
The RBI also proposed to introduce a less complex over-the-counter (OTC) interest rate rupee option, allowing banks, FIs and primary dealers to both buy and sell options and the detailed guidelines would be issued shortly for operationalising the proposal.
The RBI also permitted Indian corporates and resident individuals to invest in rated bonds and fixed income securities of listed eligible companies abroad subject to certain conditions.
Further general permission had been accorded to banks to offer forward contracts to overseas investors to hedge their foreign direct investment (FDI) to the extent of investments made in India.
UNI
