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October 22, 2001
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Some bouquets, some brickbats over Bank Rate, CRR cuts

Lauding the Reserve Bank of India's move to reduce the bank rate by 50 basis points and the cash reserve ratio by 200 basis points, Sanjiv Goenka, president, Confederation of Indian Industry has said that these measures will certainly lead to a reduction in lending rates.

Calling it the ideal combination of measures by the RBI, the CII president stated that the dual impact would include the bank rate cut sending out positive signals to the stock markets as well as to industry, which was expecting a reduction.

The CRR reduction, on the other hand, will immediately release Rs 80 billion into the system and would play a greater role in inducing banks to begin cutting deposit and lending rates.

The CII president also welcomed the implementation of prudential measures by the RBI including the setting up of the Credit Information Bureau to collect, process and share credit information on the borrowers among banks and financial institutions.

The RBI has also proposed to set up group to examine the possibility of the CIB performing the role of collecting and disseminating information on the list of suit-filed accounts and the list of defaulters, including wilful defaulters, which is currently handled by RBI.

The CII president reiterated that the presence of transparent and expeditious bankruptcy laws and procedures to ensure quick resolution of defaults and protect the efficacy of debt as a means of financing was crucial to preventing wilful default.

Commenting on encouraging universal banking, the CII president said that the crux of the matter is the cost of universal banking, specifically the cost of immediately transiting to a regime where 5.5 per cent of liabilities will have to be earmarked as CRR, and another 25 per cent as SLR.

The CII president pointed out that this cost can be prohibitive, and it seems to be the key factor that is preventing the emergence of universal banks. The CII president suggested that a viable solution to this was to insist that CRR and SLR requirements will apply only to depositors' funds.

Another measure to boost sentiment in the capital market would have been a reduction in the margin requirement on bank financing against shares from 40 per cent to 25 per cent. While this may not lead to a sudden growth in bank lending against shares, it is better than a margin requirement of 40 per cent, which has already proved itself to be too restrictive, the CII president said.


''The overall monetary stance of providing adequate liquidity for growth and revival of investment demand, flexibility in interest rate regime and maintaining option for further reduction in interest will greatly help the economy to overcome the present slackness'', Chirayu R Amin, president, Federation of Indian Chambers of Commerce and Industry said.

Indian Institute of Economic Growth

''Although the RBI has done a good job, the ball is now in the court of the government to carry forward the entire gamut of reforms, including divestment and reduction of subsidies'', monetary expert at the Indian Institute of Economic Growth B B Bhatacharya said.

The credit offtake would not be to the desired extent because of the huge pile up of the non-performing assets, he added.

Delhi School of Economics

''Lowering of growth rate projection by the RBI is realistic due to poor performance of the agriculture sector in the last year and the recent international events'', Prof V N Pandit of the Delhi School of Economics said.

''It is a mistaken notion that the reforms do not pay politically. In fact, if the government were to go to the hustings with this performance, it was sure to lose,'' he said.

The Federation of Indian Exports Organisation

The Federation of Indian Exports Organisation (FIEO-western region) vice-president, S K Saraf, said that the RBI has not addressed any issues of the exporters. At a time when exports were shrinking and world economy was undergoing a recessionary trend, exporters were expecting the central bank to announce some export-friendly measures.

All-India Exporters' Chamber

Rajesh Shroff, former president of All-India Exporters' Chamber, said that a cut in interest rate was expected after the cut announced by the US fed in the aftermath of terror attack on the US cities on September 11.

Though the market expected a similar cut in CRR rate, the 200 basis point cut has come as a total surprise to them. But, they say the announcement has come little too late, as they expected RBI to announce these measures immediately after the US fed announcement.

The All-India Importers and Exporters Association

The All-India Importers and Exporters Association president, Mohan Nilhani, said that Indian shipper-owners were disappointed because there was nothing specific in the review policy to help leap start the sagging trade.

They fear that in the current year, export-import business may fall drastically by at least over 10 per cent, as there are no major incentives for them.

Bank of Baroda

P S Shenoy, chairman of the Bank of Baroda, has termed the policy a forward looking one and said the measures would have an impact on the cost of money in the economy. Regarding the revision in prime lending rate, Shenoy preferred to review the implications of the move by RBI before taking any action.

Association of Leasing and Finance Companies

Mahesh Thakkar, president of the Association of Leasing and Finance Companies, welcomed the initiatives of the RBI to revive the economy, but was worried about its implications on returns available to small investors on bank deposits and other small saving schemes.

He also welcomed the formation of a self-regulatory organisation for the benefit of non-banking financial companies and said, it would bring further development in the sector.

However, Thakkar said that RBI has not given any investment guidelines for NBFCs.


A P Kurien of AMFI (Association of Mutual Funds of India) while calling it an encouraging policy, said, "Indian investors will have to learn to live with low interest rate scenario." The policy was on expected lines and will therefore, infuse liquidity in the economy.

ICICI Securities

Sanjeet Singh, fixed income analyst with ICICI Securities, said the move was more than expected and will certainly improve liquidity in the system and lead to economic growth. But it will also depend on how the Indian banking sector revise their prime lending rate.

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