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October 22, 2001
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RBI pares Bank Rate by 0.5%, CRR cut by 2%

UNI and Our Correspondent in Bombay

CREDIT
POLICY

In a significant move to revive the sagging market sentiment, the Reserve Bank of India on Monday affected half a percentage point cut in Bank Rate to 6.5 per cent, while pumping an additional liquidity of Rs 80 billion into the banking system through reduction of cash reserve ratio by 200 basis points to 5.50 per cent.

RBI Governor Bimal JalanIt is the lowest bank rate since May 1973.

Policy measures

Disclosing the half-yearly Credit Policy measures to the chiefs of commercial banks, RBI Governor Bimal Jalan said that these changes would facilitate the development of a short-term yield curve, development of money market, reduce the regulatory arbitrage between bank and non-banks, enhance the availability of lending resources with the banks and improve their efficiency of indirect instrument in the conduct of the Monetary Policy.

Among other measures, the RBI has announced tightening of norms of bank investment in high cost project including infrastructure and also allowed the urban co-operative banks to grant loans to individual against securities of shares, it has also modified the time frame for UCBs for achieving the prescribed level of statutory liquidity ratio holding which is at a higher proportion.

Statutory liquidity ratio

As per the revised time frame, the minimum SLR holding of UCBs in government and other securities should be at 17.50 per cent as on March 31 2002 as against 20 per cent proposed earlier. Now the 20 per cent holding would be fixed from September 30, 2002.

The RBI also enhanced the interest on eligible cash balances of commercial banks under CRR to the level of Bank Rate at 6.5 per cent from the current level of 6 per cent effective from the fortnight beginning November 3, 2001.

The cash reserve ratio will be reduced to 5.75 per cent now, and effective fortnight beginning December 29, 2001, CRR will be reduced further to 5.50 per cent of the net demand and time liabilities. At the same time all exemption on the liability will be withdrawn except inter bank liabilities for the computation of NDTL.

Addressing the bank chief executives, Jalan said that the interest rate eligible on CRR balances has been increased further to the level of the bank rate which is 6.5 per cent (6 per cent since April 21, 2001 and 4 per cent earlier).

The monetary stance would continue as in the first half of the year, he added.

Jalan said that in view of global uncertainties, a projection in the range of five to six per cent growth rate for this fiscal 'is considered reasonable' for monetary management.

Inflation outlook for the second half is comfortable, he said, adding that agricultural growth prospects remained positive and food stocks high. The annual inflation rate was 3.2 per cent as against 7.4 per cent a year ago.

Import bill

Jalan said that the oil import bill for this fiscal would be in the range of $17.5-18 billion as against actual imports of $15.6 billion in the previous fiscal, if the average oil price for the rest of the financial year is assumed to be at $25 per barrel.

The RBI aims to strengthen financial system and efforts towards this direction will continue.

RBI has provided operational flexibility to banks in "Loan System" for credit delivery.

RBI has initiated steps to closely monitor non-SLR investments by banks and financial institutions.

The RBI Current Account Facility will also be rationalised.

Expressing concern over the world economy sliding into recessionary phase particularly after September 11, Jalan said that the adverse external development has necessitated a quick response to provide an appropriate liquidity and comfort to the market.

He said the overall stance of the monetary policy for the current fiscal year would be to meet credit growth and support revival of investment demand while continuing a vigil on movement in the price level.

Notwithstanding a high level of market borrowing by the government, it was also feasible to maintain stable interest rate environment with further softening of interest rates, Jalan observed.

Current interest rate to be maintained

Unless circumstances change unexpectedly, the RBI will endeavor to maintain the current interest rate environment considering the structural constraints of the domestic financial market. Banks have to put in their best effort to reduce their operating cost by improving productivity and increasing their volume of lending.

He also cautioned the bank having large unhedged forex exposure of the large corporate which may have a negative impact under severe uncertainties. He asked the banks to put in place a system of monitoring such unhedged external exposure of their corporate clients.

Taking into account the latest developments in the prospect of the agricultural growth combined with unfavorable behavior of industrial and export sector, Jalan said that the projection of 6.0-6.5 per cent growth rate for the year 2001-02 now appeared optimistic.

Credit flow

The feedback on credit flow received from banks has revealed that during April-Aug, there was an increase in scheduled commercial bank credit to agriculture, housing, consumer durables, personal loans, tourism, pharmaceutical, automobile and construction. On the other hand the decline in credit was observed in petroleum, coal, tobacco, vegetable oil, cotton textile and all engineering and wholesale trade.

Scheduled commercial bank credit increased by 6.1 per cent (Rs 311.04 billion ) up to October 5 as against an increase of 9.7 per cent in the corresponding period last year. Food credit increased by Rs 102.11 billion as against Rs 71.93 billion in the previous year.

The increase in non food bank credit by 4.4 per cent was lower as compared to 8.5 per cent in the corresponding period last year.

However, since beginning of this month some pick up in non food bank credit is discernible. Up to October 5, money supply increased by 8.2 per cent as compared to 8.3 per cent during the same period last year.

The aggregate deposit of scheduled commercial banks increased by 9.1 per cent as compared with 8.9 per cent last year.

Reserve money

Reserve money increase by 1.8 per cent up to October 12 as compared to an increase of 1.6 per cent during the same period last year. Forex reserves increased sharply by over $10 billion to $45.1 billion by October 19 as compared with October 20 last year.

The Reserve Bank will continue its effort to simplify the procedure, reduce documentation requirement and further liberalise opportunity for productive investment in the domestic economy.

Additional inputs: PTI, Reuters

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CRR = Cash Reserve Ratio, the fortnightly cash balances maintained by commercial banks with the central bank.

Bank Rate = Bank Rate is the rate at which RBI allows finance to commercial banks. Normally, different types of refinance facilities by RBI to banks are linked to a Bank Rate. Bank Rate is a tool which RBI uses for short-term purposes. Any revision in Bank Rate by RBI is a signal to banks to revise deposit rates as well as Prime Lending Rate.

SLR = Statutory Liquidity Ratio. Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. These are collectively known as SLR securities. The buying and selling of these securities was the seed of the 1992 scam.

FCNR(B) Deposits. (foreign currency non resident Indian - banking deposits.)

FCNR (Foreign Currency Non-Resident Indian).

M1: A measure of money supply that includes all coins and notes in circulation, and personal current accounts. M3: A measure of money supply, including those covered by M2 -- a measure of money, supply, including M1, plus personal deposit accounts -- plus government deposits and deposits in currencies other than rupee.

Repo: repurchase agreements or ready forward deals, a secured short-term -- usually 15-day -- loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term it will buy back the securities at a slightly higher price, the difference in price representing the interest.


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