Highlights of the Annual Monetary Policy Statement

18 May 2004

Statement broadly follows the pattern already set in the previous years.

Domestic Developments

GDP growth for 2004-05 projected at 6.5-7.0 per cent.
Assuming no significant supply shocks and appropriate management of liquidity, the inflation rate projected for policy purposes at around 5.0 per cent during 2004-05.
Growth in reserve money and Money supply (M3) were higher during 2003-04 reflecting capital inflows; the expansionary impact of foreign currency assets, however, was neutralised to a large extent by substantial open market operation (OMO) including sustained repo operations under LAF.
Sustained pick-up in non-food credit since September; total flow of resources to the commercial sector was higher than last year.
Government market borrowing programme in 2003-04 completed at a much lower cost; while noting reduction in fiscal deficit, need to step up capital expenditure stressed.
Further reduction in interest rates in money and government securities markets observed in 2003-04.
Public sector banks have reduced their BPLR in the range of 25-100 basis points.
RBI to continue with its policy of active liquidity management; Market Stabilisation Scheme (MSS), is an additional tool.

External Developments

Global economic recovery has broadened and strengthened faster than expected despite some uncertainties.
The exchange rate of the rupee appreciated vis-à-vis US dollar but depreciated against the Euro, Pound sterling and Japanese yen in 2003-04.
India’s foreign exchange reserves increased by US $ 37.6 billion during fiscal 2003-04 and are at US $ 118.6 billion by May 7, 2004.
India’s exports in US dollar terms increased by 17.1 per cent while imports by 25.3 per cent; the current account expected to register surplus during 2003-04 for the third year in succession.
Exchange rate management, as in the past, based on flexibility, without a fixed or pre-announced target, but with ability to intervene.
The most distinguishing feature of the external sector during 2003-04 relates to the large capital flows with its inevitable implications for the conduct of domestic monetary policy and exchange rate management.

Overall Assessment

Despite uncertainties, India’s position among the top performers globally in terms of GDP growth is expected to continue during 2004-05.
As regards prices, despite overhang of problems on account of oil prices and large domestic liquidity, price situation unlikely to cause concern to macro stability during 2004-05.
Need to overcome the bottlenecks in flow of bank credit to agriculture and small & medium enterprises emphasised.
Restructuring of rural banking sector stressed for enhancing the quality, purposiveness and reach of banking in India.
Whereas the Reserve Bank will continue to provide a policy environment that avoids excessive and destabilizing volatility as a public good, market participants were urged to take into account the portfolio risks arising from any unexpected developments and provide adequately for them.
The outlook for the external sector accords comfort to the conduct of public policies.

Stance of Monetary Policy

Monetary management during 2003-04 broadly in conformity with the stance of the policy set out for the year.
Projected expansion of money supply (M3) at 14.0 per cent with credit growth by 16.0-16.5 per cent during 2004-05.
Noticeable uncertainties including geopolitical risks impacting on international oil economy reckoned while designing the stance of monetary policy. As such, the inflationary situation needs to be watched closely and there could be no room for complacency on this count.
The overall stance of monetary policy for 2004-05 will be: (i) provision of adequate liquidity to meet credit growth and support investment and export demand while keeping a very close watch on the movements in the price level. (ii) Consistent with the above, while continuing with status quo, RBI to pursue an interest rate environment that is conducive to maintaining momentum of growth and, macroeconomic and price stability.

Measures

Bank Rate kept stable at 6.0 per cent.
Repo Rate unchanged at 4.5 per cent.
Revised LAF scheme operationalised.
The entire export credit refinance was made available at reverse repo rate.
Almost all banks have adopted the new system of BPLR and the rates are lower from their earlier PLRs.
Banks are encouraged to align the pricing of credit to assessment of credit risk to improve credit delivery and credit culture.
RBI accepted some recommendations of the interim Report of Vyas Committee for implementation, e.g., loans for storage facilities under priority sector, securitised agricultural loans as priority sector lending, waiving margin/security requirements for certain agricultural loans up to a limit, NPA norms for crops loans aligned to crop seasons.
Development of mechanism for debt restructuring for medium enterprises on the lines of corporate debt restructuring.
Definition of infrastrucutre lending broadened.
Working Group constituted on Credit Enhancement by State Governments for financing infrastructure.
A Gold Card Scheme for creditworthy exporters drawn up.
Various restructuring options being considered by the Government and other stakeholders for rationalising the structure of RRBs - Vyas Committee is also looking into restructuring of RRBs.
Limit on the lending of non-bank participants in the call/notice money market reduced to 45 percent effective June 26, 2004.
Automated value-free transfer of securities proposed between market participants and the CCIL under CBLO.
RBI constituted Working Group to review the performance of negotiated dealing system (NDS).
Clearing of OTC derivatives through CCIL being considered.
CCIL to work out arrangement for settlement of trades in non-SLR debt instruments for NDS members.
Discussion paper on Capital Indexed Bonds being put in public domain.
The ECB limit already enhanced to US $ 500 million under the automatic route for investment in the real sector.
Resident individuals already permitted to remit freely up to US $ 25,000 per calendar year.
Indian corporates and partnership firms allowed to invest overseas upto 100 per cent of their net worth.
Banks allowed to raise long-term bonds to finance infrastructure.
The extant limit on unsecured exposures for banks withdrawn.
Exposures on all public financial institutions (PFIs) to attract a risk weight of 100 per cent.
Banks required to maintain capital charge for market risk in a phased manner.
Banks to draw a road map for migration to Basel II.
Banks to make higher provisioning according to the age of NPAs.
Banks/FIs to provide credit information to CIBIL.
Banks to fully adhere to the KYC policy for opening new accounts.
Report of the Working Group on Financial Conglomerates is being put in public domain.
Risk based supervision extended to more banks.
Fresh licences to UCBs only after a comprehensive policy.
Report of the Working Group on Development Finance Institutions is being put in public domain.
Technical Group to evaluate the regulatory and supervisory systems deployed by refinancing institutions (RFIs).
Waiver of service charges on banks for electronic funds transfer and electronic clearing services.
RBI sets up a Board for Payment and Settlement Systems.
RBI expects most commercial banks to join the RTGS system by June 2004.
A Working Group on Electronic Funds Transfer for Capital Market constituted.
Single window services for all transactions in RBI cash department.
Operationalisation of On-line Tax Accounting System by June 2004.
Standing Committee on Procedures and Performance Audit on Public Services has submitted four Reports, being put in the public domain.
The recommendations of the Advisory/Technical Groups on International Financial Standards and Codes are being pursued.