Mumbai: Reserve Bank of India (RBI) governor Dr Bimal Jalan has announced the Midterm Review of the Credit Policy for the year 2002-03.

Jalan 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 government’s borrowing programme might be impacted by a lower growth.

Addressing 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 India’s 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 last year.

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 growth.

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 level.

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.

Although deposits 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.

On 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.