The Reserve Bank of India governor, Bimal Jalan presented the mid-year review of the monetary and credit policy measures to bank chairmen for the year 1999-2000.

CRR - The cash reserve ratio has been reduced to nine per cent, a reduction of one percentage point. This is a clear indication from the RBI that it wants interest rates to climb further down. Banks have been exempted from adhering to the cash reserve ratio requirements for deposits collected through the foreign currency non-resident (FCNR) scheme. These two measures will release around Rs.8,060 crore worth liquidity into the system

Interest rates - The 30 per cent interest rate surcharge on import finance has been done away with. The RBI has also removed the 20 per cent minimum interest rate limit on export bills that are overdue. Banks are now free to charge interest on overdue bills as they wish to. Banks will also be allowed to lend below their prime lending rates in a few sectors.

Mutual Funds - Mutual funds have been allowed to conduct interest rate swap and forward rate agreement operations with banks, financial institutions and primary dealers. The money market mutual funds will come under the purview of the Securities and Exchange Board of India. Banks that set up money market mutual funds have to set up a separate trust.

Gilt and income funds of mutual funds can now take advantage of the cheque writing facility. Thus, mutual funds can now almost compete with commercial banks for deposits.

FDI - Henceforth, companies that raise funds or issue shares to foreign collaborators through the automatic approval mechanism, need not seek RBI permission.

Infrastructure - The priority sector limit for housing loans in urban areas and the metros has been increased to Rs.10 lakhs from Rs.5 lakhs. Investments made in National Housing Bank and Hudco bonds will be treated as priority sector loans.

Y2K - Banks will be provided with liquidity support for tackling the Y2K problem. Foreign banks have also been granted permission to bring in funds from their parents, provided these funds are repatriated between the period 1 December 1999 and 31 January 2000.

FCNR(B) - The minimum tenure for foreign currency non-resident (B) deposits has been increased to one year from the current six months. The RBI has thus indicated that it discourages short term inflows and outflows.

Risk weightage - Banks have been asked to provide an additional 2.5 per cent on investments made in all securities, as a cover for the market risk undertaken. This 2.5 per cent will be applicable to all investments, including those made in securities outside the statutory liquidity ratio.

First impression In an immediate feedback to the Reserve Bank of India announcements, bankers felt that a reduction in interest rates was a little too premature. State Bank of India, which has been historically the benchmark-fixer in the Indian banking industry, has said that it will not reduce its prime lending rates. Currently, the PLR of SBI stands at 12 per cent. Bank of Baroda and Bank of India have also shown disinterest in reducing their PLRs.

The six-month forward premium in the foreign exchange market slipped to 5.2 per cent on 29 October 1999 from the closing of 5.47 per cent on 28 October 1999. The three-month forward premium dropped to 4.87 per cent from 5.38 per cent, while the one year forward premium slided to 5.31 per cent from 5.49 per cent. The general view is that for a cut in the cash reserve ratio by one per cent, the forward premia should go down by about 30 paise.

In the gilt markets, the government securities prices went up by a few paise. If call rates go down, as it is expected, there would be a fall in the yield on gilt-edged securities in the secondary market.

Bankers and financial institutions are confused as to 2.5 per cent risk weightage provision that has been announced on investments made in all securities.

RBI’s findings The RBI feels that though interest rates should ease, banks may not be in a position to slash their lending rates. It is also worried about the rising oil prices internationally and the low exports performance.

It has brought down the expected GDP growth rate range for the year 1999-2000 to 6-6.5 per cent from the 6-7 per cent that was projected earlier. It is to be noted here that the Central Statistical Organisation has estimated GDP to grow by around 5.8 for the year 1999-2000.

The RBI is of the view that industrial and agricultural production will be higher during 1999-2000 than in the previous years.

The annual money supply growth also called M3, has gone down to 16 per cent from 21.1 per cent during same period during the last year. The RBI says that there has been a good growth in bank credit. Non-food credit has grown by 4.2 per cent as compared to the 2.6 per cent in 1998-99.

On the inflation front the RBI has reduced its expectations to 4.8 per cent from the earlier range of 5 to 6 per cent.

The current account deficit is also expected to remain below 2 per cent of GDP in spite of an increase in oil prices.

The index of industrial production has gone up by six per cent, mainly on account of the performance of the manufacturing sector. The rise in credit off-take has also been attributed to the higher industrial production.