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October 22, 2001
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Rate cut will not change investors' preference: Jalan

The Reserve Bank of India Governor Bimal Jalan on Monday said the bank rate cut will not change the basic pattern of investors' preference for deposits.

"We do not see a fundamental change in the structure of investment with this measure (rate cut) introduced by us," Jalan told reporters here after announcing the apex bank's mid-term review of monetary and credit policy for 2001-02.

RBI has reduced the bank rate by 50 basis points from seven per cent to 6.5 per cent.

"Generally the banks reduce the interest rates (deposit and lending) following RBI decision, but it is left to each bank to take the decision," Jalan said.

The stance of stable and soft interest regime would continue in the second half of the current fiscal, Jalan said.

By reducing the rates RBI was creating an environment that permitted the industry's access to funds at lower costs, he added.

Suggesting that banks adopt a variable interest rate policy for long term deposits, the RBI governor said, "if one wants flexibility, the rates cannot be tied to a three or four year perspective."

However, he said the banks were not adopting variable rate policy due to lack of computerisation and investors' preference.

On the drastic cut in cash reserve ratio by two per cent, Jalan said RBI was guided by an objective to provide conducive growth environment.

"The low inflation scenario has helped to take this decision," Jalan said, adding with adequate liquidity the credit offtake should generate a favourable response from the industrial sector.

The RBI has revised the interest rate on the CRR whereby banks would earn about Rs 10 billion, he said.

"We expect banks to build investment fluctuation reserves from this earnings in order to equip themselves for changes in the economic and monetary enviroment," the RBI governor said.

He said the apex bank was examining a proposal for urban co-operative banks to raise the insurance cover ceiling for deposits or make it optional for them.

The rise in quantum of insurance cover may raise the premium charged by the companies and also there was a moral hazard of bank management misusing the facilities.

The Monetary & Credit Policy

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