Reserve Bank of India (RBI) governor Dr Bimal Jalan
has announced the Midterm Review of the Credit Policy
for the year 2002-03.
announced a cut in the Bank Rate from 6.5 per cent to
6.25 per cent and a cut in the Repo rate from 5.7 per
cent to 5.5 per cent. The cash reserve ratio (CRR) has
also been brought down to 4.75 per cent from 5 per cent
and banks will now be required to maintain 80 per cent
of the CRR on a daily basis.
On the issue of
rate cuts, Jalan said there is no further scope of reducing
the Bank Rate from the present level considering the quite
comfortable liquidity condition in the system. No useful
purpose is likely to be served by a further reduction
in the Bank Rate in the near future.
While the present
level of the Bank Rate is the lowest since 1973, the CRR
had been reduced by as much as 3.75 per cent over the
last two years. Jalan has also proposed to pay interest
on eligible CRR balances on a monthly basis with effect
from April 2003.
The cut in the
Bank Rate will prompt commercial banks to lower their
prime lending rates (PLRs) and the rates will reach historic
lows. A major cut is expected in the savings bank rate,
which may come down from 4 per cent to 3.5 per cent.
With an already
low rate of 4 per cent, no one considers a savings bank
account as an investment. These accounts are maintained
only for transactional convenience and perhaps the cut
in the rate will not pinch much. However, a cut in the
fixed deposit rate will certainly hurt depositors, especially
senior citizens for whom this is the only source of income.
The RBI lowered
its forecast for the gross domestic product (GDP) growth
for the financial year to 5-5.5 per cent from its earlier
estimate of 6-6.5 per cent, saying the governments
borrowing programme might be impacted by a lower growth.
the bankers, Jalan said the reduction in the GDP estimate
is mainly due to the poor rainfall in some parts of India,
and added that the production of the food grains this
year would be lower than the last year by about 5 per
cent. There are signs of recovery in the industrial
production during the first half of the year.
The RBI, however,
retained its earlier estimate of the inflation rate for
the year at around 4 per cent.
The central bank
has also lowered the Repo rate, the short-term benchmark,
to 5.5 per cent from 5.75 per cent, with effect from 30
October 2002. The cut in the CRR is to be effective from
16 November 2002.
The RBI said it
will keep the Bank Rate steady until the end of the financial
year unless circumstances changed. Jalan said Indias
foreign exchange reserves have been comfortable at present
and consistent with the rate of growth.
On bank credit,
he said excluding the impact of mergers, the scheduled
commercial bank credit grew by 6.6 per cent up to 4 October
2002 as against 6.8 per cent in the corresponding period
Food credit declined
by Rs 800 crore (Rs 8 billion) in contrast to an increase
of Rs 10,200 crore (Rs 102 billion) in the previous year
on account of a lower procurement and high off-take of
food grains. The growth in non-food credit was higher
at 7.4 per cent as compared to 5.2 per cent in the same
period last year, indicating a better outlook for industrial
Keeping in view
the positive growth prospects in exports as well as foreign
exchange reserves, the governor reiterated that the central
bank will continue to provide adequate liquidity to meet
credit growth and support investment demand in the economy
while continuing a vigil on the movements in the price
He also emphasised
the role the central bank plays in the policy of active
demand management of liquidity through open market operations
and the use of policy instruments to impart greater flexibility
to the interest rate structure in the medium term.
Referring to the
statutory liquidity ratio of regional rural banks, the
RBI has proposed that statutory liquidity ratio (SLR)
holdings of these entities in the form of deposits with
sponsor banks maturing beyond 31 March 2003 may be allowed
to be retained till maturity.
with sponsor banks contracted before 30 April 2002 will
be reckoned for SLR purpose till maturity, regional rural
banks are advised to achieve the target of maintaining
25 per cent SLR in government securities out of the maturity
proceeds of such deposits with sponsor banks as well as
from their incremental public deposits at the earliest.
On the interest
rate policy, the apex bank said in order to further improve
flexibility banks have been given freedom to decide the
period of reset on variable rate deposits. Banks are also
encouraged to review both their PLRs and spreads, and
align spread within reasonable limits around the PLR subject
to approval of their boards.
The RBI also proposes
to liberalise interest rates on export credit in rupee
terms in two phases in a bid to increase the flow of credit
to the export sector and encourage competition among banks.
In the first phase,
the ceiling rate on the PLR (plus 0.5-percentage point
on the pre-shipment credit beyond 180 days up to 270 days,
and the post-shipment credit beyond 90 days up to 180
days) will be deregulated from 1 May 2003.
Banks will have
freedom to charge PLR or sub-PLR rates subject to approval
of their boards. In the second phase, the rates on the
pre-shipment credit up to 180 days and the post-shipment
credit up to 90 days should be discontinued to encourage
greater competition on a date to be announced later.
the repayment of export credit, the repayment / payment
of the pre-shipment credit will be permitted, subject
to a mutual agreement between the exporter and the banker.
The balances held in the Exchange Earnings Foreign Currency
account of the exporter can be used.