Monetary and Credit Policy for 2002-03: An overview

Our Banking Bureau
29 October 2002

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.