Credit Policy curtain raiser : No major surprises in the offing

Pradeep Rane
28 October 2002

With the government continuing to be a big borrower in the market and the industry continuing to show signs of recession, the central bank will maintain its soft interest rate regime and it would specify the serious fiscal situation as a negative or constraint for maintaining this stance.

The government has borrowed Rs 98,000 crore till October first week, which is about 69 per cent of the budgeted Rs 1,42,867 crore for the entire fiscal. This means that it is likely to overshoot its target.

It would be interesting to see whether the RBI spells out in detail its concerns on “sustainability of public debt,” a theme it propounded during the last credit policy. The RBI is also likely to mention credit off-take, geopolitical factors and inflation as the areas to watch, for any short-term shifts in this stance.

In line with the medium-term policy of the RBI, there is a case for reduction in the cash reserve ratio (CRR). The CRR refers to the percentage of its deposits in cash that banks are required to keep with the RBI. Reducing this percentage increases the amount of funds a bank can lend to borrowers.

But, since the system liquidity is ample, the chances of a 50-basis points (bps) cut are 50:50. The RBI might also contemplate providing a roadmap to reach the medium-term target of 3 per cent. Any reductions in the CRR are expected to be counter-balanced through open market sales.

The expected rationalisation in refinance limits, which was not done in the previous credit policy, might be attempted now. Further, streamlining could be expected in the call money lending and borrowing operations.