M A I N   N E W S

Key bank rates, CRR remain unaltered
RBI monetary, credit policy released

RBI Governor Y.V. Reddy (right) smiles while announcing the new monetary and credit policy in Mumbai on Monday. — Reuters photo

Mumbai, November 3
Defying market expectations, the Reserve Bank of India today left untouched key interest rates, including the bank rate, even as it revised upwards the GDP growth rate to 6.5-7 per cent for 2003-04 against 6 per cent projected in April.

The bank rate at 6 per cent, repo rate and cash reserve ratio at 4.5 per cent remained unaltered.

Releasing his maiden mid-term monetary and credit policy, RBI Governor Y.V. Reddy said the monetary policy stance would continue to make provisions of adequate liquidity to meet the credit growth and would support investment demand. There will be a vigil on the price level with preference for soft and flexible interest rate environment, he said.

Projecting an inflation rate of 4-4.5 per cent with a possible downward bias as compared to earlier projection of 5-5.5 per cent, he said the outlook remains benign.

The RBI would, however, continue to closely monitor the price behaviour leaving no room for complacency on inflation front, Mr Reddy said.

The Governor said on the current reckoning, based on growth prospects across the sectors of the economy, and assuming the continuance of good performance in industry and some acceleration in exports, reflecting the anticipated global economic recovery, it is reasonable to expect an overall GDP growth of 6.5-7 per cent.

Expressing concern over the large-scale borrowings by central and state governments, Mr Reddy said fiscal deficit as at end-September is higher compared to last year.

Referring to concerns on the large borrowing programme, Mr Reddy said “they arise both out of a possible adverse impact on desired acceleration in growth that is consistent with stability and also from possible implications for efficient monetary and debt management”.

“It is, therefore, essential to pursue promptly and with resolve, fiscal consolidation from a medium-term perspective,” he said adding that there was also a need for efforts in the direction of widening the revenue base, rationalisation of expenditures and above all enhancing productivity of public investments, in both commercial and social sectors.

The RBI Governor also observed that while lending rates for prime corporates and housing had declined significantly, noticeable reduction is yet to take place in regard to other segments.

On the foreign exchange market, he said the forex rate of the rupee, which was Rs 47.5 per US dollar at end-March 2003 appreciated by 4.8 per cent to Rs 45.32 by end-October but depreciated against euro, pound sterling and Japanese yen.

“The exchange rate management is based, as in the past, on flexibility without a fixed or pre-announced target, but with ability to intervene,” he added.

Mr Reddy observed that the financial market sentiments are stronger now compared to the beginning of the year and the health of financial sector continued to improve. However, there is a need for continuous and careful monitoring providing for unforeseen contingencies since in the upturn of business cycle, there could be overshooting of markets.

On prime lending rate and spread, the RBI Governor said banks may price floating rate products by using market benchmarks in a transparent manner.

As the Indian Banks Association has indicated a broad agreement on the proposed benchmark PLR, the IBA may advise its members suitably, keeping in view the operational requirements, he said.

He also indicated that though credit growth remained subdued till August 2003, there were some signs of pick-up in non-food credit.

“Apart from subdued credit growth, which will continue to cause concern, the overall rigidity in the downward movement of lending rates as well as inadequacy in quality of service to some sections coupled with reduction in deposit rates requires introspection and immediate action on the part of all financial intermediaries”, he said.

In this regard, credible actions by banks would be essential to make adequate progress in credit delivery and appropriate transparency in pricing of credit, he said.

Mr Reddy, on the overall assessment, said the interest rates and foreign exchange reserves were at comfortable levels and there was adequate liquidity in the system.

To provide full flexibility to exporters, Mr Reddy said beginning January 1, exporters may write off outstanding export dues on their own and may also extend the normal period of realisation beyond 180 days provided the aggregate value of such write-off and delay in realisation did not exceed 10 per cent of their export proceeds in a single calendar year.

Referring to the inter-bank call/notice money market, Mr Reddy said with effect from the fortnight beginning December 27, non-bank participants would be allowed to lend, on average in a reporting fortnight, up to 60 per cent of their average daily lending in call/notice money market during 2000-01.

He said the central bank might also consider providing temporary permission to lend a higher amount in call/notice market for a specific period on a case-to-case basis.

He said with effect from February 27, 2004, primary dealers would be allowed to borrow, on average in a reporting fortnight, upto 200 per cent of their net owned funds as at end March of preceding financial year.

On prudential norms for financial institutions (FIs), the RBI has proposed to adopt the 90-day norm for the recognition of loan impairment for FIs with effect March 31, 2006.

However, Mr Reddy said, to mitigate the burden of additional provisioning arising out of adoption of the revised norm, they are permitted to phase out the required provisioning over a period of three years, beginning from the year ending March 2006 with a minimum of one-fourth of the additional provisioning being made each year. — PTI

Measures at a glance Bank rate kept unchanged at 6 per cent. Cash Reserve Ratio kept unchanged at 4.5 per cent in view of current liquidity situation. Indian Bank Association (IBA) to advise on bench mark PLR. Simplification of procedures and complete flexibility in micro-finance structure proposed to boost credit flow. Further move towards pure inter-bank call/notice money market. Flexibility in the sale of government securities contracted for purchase with adequate safeguards. Banks to ensure hedging of foreign currency loans to corporates above $ 10m except for exporters and for forex expenditures. Flexibility to exporters in the realisation of export proceeds and write-off of overdue, up to 10 per cent of their export proceeds in a calendar year. Banks advised to quickly build up Investment Fluctuation Reserve (IFR) so that they are better positioned to meet interest rate risks. Road map for financial institutions to adopt 90 days norm for recognition of loan impairment. Standing Technical Advisory Committee on Financial Regulation for both banks and non-banks proposed. Standing Committee to be set up on Procedures and performance Audit on Public Services rendered by Reserve Bank.