29 April 2003
Presenting the Monetary and Credit Policy 2003-04,
Reserve Bank of India (RBI) Governor Dr Bimal Jalan has
announced a 0.25-per cent cut in the bank rate, effective
from the close of business hours today.
Jalan has also
announced a 2.5-per cent cut in the cash reserve ratio
(CRR) to bring the CRR down to 4.5 per cent beginning
the fortnight of 14 June 2003.
The gross domestic
product (GDP) growth, he said, is expected at 6 per cent
assuming the satisfactory spatial distribution of the
monsoons. "The inflation is expected to be in the
range of 5-5.5 per cent in 2004."
Jalan said in view
of the several structural constraints, the existing nominal
and real interest rates are relatively low. "There
may not be significant potential for further sizeable
downward movement in interest rates."
The above announcements
are more or less on expected lines and markets and businesses
will not have much difficulty in factoring the changes.
Inflation, which was around 3.5 per cent in the previous
fiscal, needs to be watched closely. Over the last two
years the bank rates have been cut sizeably, as the inflation
rates were low and the bank rates were pruned to match
with the real interest rates. With inflation rates on
the rise, we may see the real interest rates rising and
correspondingly a rise in the borrowing as well the lending
The cut in the
CRR is expected to release about Rs 3,000 crore into the
economy, a volume which is equivalent to about one day''s
trading. Bond traders had already taken positions before
the policy announcement and on release of the policy announcement
they sold heavily. However, the amount of money released
being not very significant, the markets are expected to
see normal activity in a day or two.
have been permitted to set their own sector-wise prime-lending
rate (PLR). Jalan said for determination of the benchmark
PLR, banks should take into account their actual cost
of funds, operating expenses, minimum margin to cover
regulatory requirement of provisioning and capital charge,
and profit margin.
The system of tenor-linked
PLR has been discontinued. The effective date for discontinuation
and tenor-linked PLR will be further discussed with banks
and a decision will be announced separately in due course,
The RBI also proposes
to review the system of determination of the benchmark
PLR by banks and actual prevailing spreads in September
The RBI governor
said it is proposed to continue with the policy of maintaining
adequate liquidity in the system and a soft interest rate
environment. "In case, demand pressures emerge and
the inflationary situation worsens, which hopefully would
not be the case, the existing monetary policy stance may
have to be reviewed."
Referring to urban
cooperative banks (UCBs), Jalan said the apex bank has
proposed to exempt both gold and small loans up to Rs
1 lakh from the 90-day norm for recognition of loan impairment.
It has also been
proposed to permit UCBs to place deposits with strong
scheduled UCBs (other than banks classified as weak or
sick) with certain conditions, and detailed guidelines
in this regard will be issued separately. "The RBI
has also decided to revise the ceiling on unsecured advances
by UCBs in order to provide greater flexibility."
in the world economy the governor said the uncertainty
regarding the economic outlook remains high due to the
ongoing geopolitical developments and the country''s macroeconomic
policies will have to continue to focus on strengthening
the fundamentals of the economy.
He added that the
country''s foreign exchange reserves have increased substantially,
which enabled the government to prepay their loans. This
has justified the government''s policies of handling foreign
exchange, which selectively softened foreign exchange
release norms last year.
slack khariff season policy announcement also provides
for banks to provide enhanced credit to the priority sector
that is agriculture, small-scale industry and small businesses.
The overall credit off-take in the previous year had increased
and the coming year is also expected to see an increase
in the credit off-take.
The Monetary Policy
will be reviewed in October 2003 when the busy rabi