Mumbai: Reserve Bank of India governor Dr Bimal Jalan, in his mid-term review of the credit policy for the year 2002-2003, cut the Bank Rate from 6.5 per cent to 6.25 per cent, the repo rate from 5.7 per cent to 5.5 per cent and the cash reserve ratio from 5 per cent to 4.7 per cent. The mid-term review is an annual feature and is meant to bring monetary and structural changes to suit the credit demands of the rabi season.

The Bank Rate was brought down keeping in view the low inflation rate, which is expected to remain at 4 per cent. It also indicates that our economy is operating on a soft interest rate regime.

The Reserve Bank marked down GDP growth rate for the year from 6-6.5 per cent to 5-5.5 per cent. It said the agricultural GDP was likely to decline by about 1.5 per cent and food grain production might decline about 0.5 per cent year-on-year on account of a deficient south-west monsoon.

"Despite the drought conditions, liquidity is plentiful, inflation is at its lowest and foreign exchange reserves are at the highest level ever. We have not changed the monetary policy stance and will continue to make sure credit is available where needed. The flow of resources to the commercial sector from banks has grown 7.4 per cent compared to 5.1 per cent the previous year, suggesting a recovery,'''' Dr Jalan said.

Dr Bimal Jalan told the press he would not hesitate to reduce the cost of money further should it help fuel an evident recovery. The Bank Rate will be held at the current level till March 31, 2003.

Cutting the Bank Rate will spur commercial banks to bring down their lending rates to borrowers. This is expected to give a fillip to the credit off-take of banks, as there will be more people willing to set up projects at low interest rates.

The leading commercial bank, the State Bank of India, has already cut its lending rate by 0.25 per cent across the board, and other banks are expected to follow suit.

However, lowering interest rates is not enough for economic recovery. In the first place, the interest rates are structured differently to meet the requirements of different sectors of the economy. There is a historic and in-built rigidity in the banking system that makes easy flow of credit difficult.

The reluctance of the branch manager to lend is another restricting factor. In most cases of loan default, the axe always falls on the branch manager and middle-level officers. Even a small bad loan of Rs one lakh can ruin the career of these officers, making them reluctant to take risks.

Next comes the question of availability of good borrowers and good projects. A look at the NPA profile will show that a large number of bad loans are due to misuse of funds. Also in today’s scenario, good projects are hard to come by.

Industry and industry associations have not reacted favourably to the initiatives. Industry was expecting a one per cent cut in the bank rate, which, they feel, would have really spurred credit off-take.

The Federation of Indian Chambers of Commerce and Industry (Ficci) described the policy as being one of “abundant caution”. Ficci said the Bank Rate cut fell short of industry expectations. Other industry associations also reacted similarly. The Federation of Indian Export Organisations (FIEO) pointed out that the policy offered no respite to exporters. It felt that the comfortable foreign exchange position had made the government confident that it does not need any support from the export sector.

Dr Jalan, however, stated in his review that credit had increased in the last half-year and there are signs that it will increase further in the next half.

Finance minister Jaswant Singh said that the Reserve Bank of India''s mid-term review of the Credit Policy for 2002-03 would benefit the people. “If interest rates are lowered, it will benefit the common people.” Mr Singh added, “The policy is progressive. I think it is a forward-looking and appropriate credit policy.''''