The Reserve Bank of India governor, Bimal Jalan presented
the mid-year review of the monetary and credit policy
measures to bank chairmen for the year 1999-2000.
- The cash reserve ratio has been reduced to nine per
cent, a reduction of one percentage point. This is a clear
indication from the RBI that it wants interest rates to
climb further down. Banks have been exempted from adhering
to the cash reserve ratio requirements for deposits collected
through the foreign currency non-resident (FCNR) scheme.
These two measures will release around Rs.8,060 crore
worth liquidity into the system
rates - The 30 per cent interest rate surcharge on import
finance has been done away with. The RBI has also removed
the 20 per cent minimum interest rate limit on export
bills that are overdue. Banks are now free to charge interest
on overdue bills as they wish to. Banks will also be allowed
to lend below their prime lending rates in a few sectors.
Funds - Mutual funds have been allowed to conduct interest
rate swap and forward rate agreement operations with banks,
financial institutions and primary dealers. The money
market mutual funds will come under the purview of the
Securities and Exchange Board of India. Banks that set
up money market mutual funds have to set up a separate
and income funds of mutual funds can now take advantage
of the cheque writing facility. Thus, mutual funds can
now almost compete with commercial banks for deposits.
- Henceforth, companies that raise funds or issue shares
to foreign collaborators through the automatic approval
mechanism, need not seek RBI permission.
- The priority sector limit for housing loans in urban
areas and the metros has been increased to Rs.10 lakhs
from Rs.5 lakhs. Investments made in National Housing
Bank and Hudco bonds will be treated as priority sector
- Banks will be provided with liquidity support for tackling
the Y2K problem. Foreign banks have also been granted
permission to bring in funds from their parents, provided
these funds are repatriated between the period 1 December
1999 and 31 January 2000.
- The minimum tenure for foreign currency non-resident
(B) deposits has been increased to one year from the current
six months. The RBI has thus indicated that it discourages
short term inflows and outflows.
weightage - Banks have been asked to provide an additional
2.5 per cent on investments made in all securities, as
a cover for the market risk undertaken. This 2.5 per cent
will be applicable to all investments, including those
made in securities outside the statutory liquidity ratio.
In an immediate feedback to the Reserve Bank of India
announcements, bankers felt that a reduction in interest
rates was a little too premature. State Bank of India,
which has been historically the benchmark-fixer in the
Indian banking industry, has said that it will not reduce
its prime lending rates. Currently, the PLR of SBI stands
at 12 per cent. Bank of Baroda and Bank of India have
also shown disinterest in reducing their PLRs.
six-month forward premium in the foreign exchange market
slipped to 5.2 per cent on 29 October 1999 from the closing
of 5.47 per cent on 28 October 1999. The three-month forward
premium dropped to 4.87 per cent from 5.38 per cent, while
the one year forward premium slided to 5.31 per cent from
5.49 per cent. The general view is that for a cut in the
cash reserve ratio by one per cent, the forward premia
should go down by about 30 paise.
the gilt markets, the government securities prices went
up by a few paise. If call rates go down, as it is expected,
there would be a fall in the yield on gilt-edged securities
in the secondary market.
and financial institutions are confused as to 2.5 per
cent risk weightage provision that has been announced
on investments made in all securities.
The RBI feels that though interest rates should ease,
banks may not be in a position to slash their lending
rates. It is also worried about the rising oil prices
internationally and the low exports performance.
has brought down the expected GDP growth rate range for
the year 1999-2000 to 6-6.5 per cent from the 6-7 per
cent that was projected earlier. It is to be noted here
that the Central Statistical Organisation has estimated
GDP to grow by around 5.8 for the year 1999-2000.
RBI is of the view that industrial and agricultural production
will be higher during 1999-2000 than in the previous years.
annual money supply growth also called M3, has gone down
to 16 per cent from 21.1 per cent during same period during
the last year. The RBI says that there has been a good
growth in bank credit. Non-food credit has grown by 4.2
per cent as compared to the 2.6 per cent in 1998-99.
the inflation front the RBI has reduced its expectations
to 4.8 per cent from the earlier range of 5 to 6 per cent.
current account deficit is also expected to remain below
2 per cent of GDP in spite of an increase in oil prices.
index of industrial production has gone up by six per
cent, mainly on account of the performance of the manufacturing
sector. The rise in credit off-take has also been attributed
to the higher industrial production.