Our Banking Bureau 29 April 2003

Mumbai: Presenting the Monetary and Credit Policy 2003-04, Reserve Bank of India (RBI) Governor Dr Bimal Jalan has announced a 0.25-per cent cut in the bank rate, effective from the close of business hours today.

Jalan has also announced a 2.5-per cent cut in the cash reserve ratio (CRR) to bring the CRR down to 4.5 per cent beginning the fortnight of 14 June 2003.

The gross domestic product (GDP) growth, he said, is expected at 6 per cent assuming the satisfactory spatial distribution of the monsoons. "The inflation is expected to be in the range of 5-5.5 per cent in 2004."

Jalan said in view of the several structural constraints, the existing nominal and real interest rates are relatively low. "There may not be significant potential for further sizeable downward movement in interest rates."

The above announcements are more or less on expected lines and markets and businesses will not have much difficulty in factoring the changes. Inflation, which was around 3.5 per cent in the previous fiscal, needs to be watched closely. Over the last two years the bank rates have been cut sizeably, as the inflation rates were low and the bank rates were pruned to match with the real interest rates. With inflation rates on the rise, we may see the real interest rates rising and correspondingly a rise in the borrowing as well the lending rates.

The cut in the CRR is expected to release about Rs 3,000 crore into the economy, a volume which is equivalent to about one day''s trading. Bond traders had already taken positions before the policy announcement and on release of the policy announcement they sold heavily. However, the amount of money released being not very significant, the markets are expected to see normal activity in a day or two.

Banks have been permitted to set their own sector-wise prime-lending rate (PLR). Jalan said for determination of the benchmark PLR, banks should take into account their actual cost of funds, operating expenses, minimum margin to cover regulatory requirement of provisioning and capital charge, and profit margin.

The system of tenor-linked PLR has been discontinued. The effective date for discontinuation and tenor-linked PLR will be further discussed with banks and a decision will be announced separately in due course, he said.

The RBI also proposes to review the system of determination of the benchmark PLR by banks and actual prevailing spreads in September 2003.

The RBI governor said it is proposed to continue with the policy of maintaining adequate liquidity in the system and a soft interest rate environment. "In case, demand pressures emerge and the inflationary situation worsens, which hopefully would not be the case, the existing monetary policy stance may have to be reviewed."

Referring to urban cooperative banks (UCBs), Jalan said the apex bank has proposed to exempt both gold and small loans up to Rs 1 lakh from the 90-day norm for recognition of loan impairment.

It has also been proposed to permit UCBs to place deposits with strong scheduled UCBs (other than banks classified as weak or sick) with certain conditions, and detailed guidelines in this regard will be issued separately. "The RBI has also decided to revise the ceiling on unsecured advances by UCBs in order to provide greater flexibility."

Regarding developments in the world economy the governor said the uncertainty regarding the economic outlook remains high due to the ongoing geopolitical developments and the country''s macroeconomic policies will have to continue to focus on strengthening the fundamentals of the economy.

He added that the country''s foreign exchange reserves have increased substantially, which enabled the government to prepay their loans. This has justified the government''s policies of handling foreign exchange, which selectively softened foreign exchange release norms last year.

The slack khariff season policy announcement also provides for banks to provide enhanced credit to the priority sector that is agriculture, small-scale industry and small businesses. The overall credit off-take in the previous year had increased and the coming year is also expected to see an increase in the credit off-take.

The Monetary Policy will be reviewed in October 2003 when the busy rabi season begins.