Reserve Bank of India Governor Dr Bimal Jalan on Monday unveiled a cautious a monetary policy which left interest rates mostly unchanged, but promised to provide funds needed to sustain an expected economic recovery. The central bank forecast a higher GDP growth of 6.0-6.5 per cent in the current year ending on March 31 from 5.4 per cent last year, thanks to improved farm sector growth and a pick-up in exports riding a global economic recovery. Some major highlights * Growth rate in 2002-03 projected at 6% to 6.5%. Inflation to remain low. * Monetary conditions and liquidity position to remain highly comfortable. * Further cut in CRR by 50 basis points. * Bank rate may be cut by up to 50 basis points depending on monetary developments, no timing fixed yet. * No change in interest rate on savings account. The RBI cut banks’ cash reserve ratio (CRR) to 5.0 per cent effective mid-June from 5.5 per cent, a move which will release Rs 5,000 crore ($1.02 billion) to banks for lending. However, it left the benchmark bank rate, which is used by commercial banks to price their loans, steady at 6.5 per cent but Jalan said it would consider a reduction of up to half a percentage point if conditions warranted. The savings bank deposit rates were also left untouched at four per cent. Jalan made it clear that the policy statement needed to be viewed against the very comfortable macroeconomic scenario—very healthy foreign exchange reserves, low inflation and sufficient liquidity in the system. In short, Jalan’s latest policy is aimed at facilitating better credit delivery and moving forward with structural reforms. On the deposits side, the RBI has pushed for an important change—a flexible rate system for all new deposits, with reset at six-monthly intervals. A fixed rate option is also to be made available by banks to depositors. For instance, banks may offer longer term deposits with six-monthly resets and at the same time offer a fixed rate for similar maturity, the interest rate on which may be higher and lower depending on the period of deposits and the bank’s perception of inflation as well as interest-rate outlook over the longer period. Another important move by the central bank has been on the lending rate side. The RBI feels the current mark-up over prime lending rates (PLR) of banks are high. It feels in the present interest rate environment, it is not reasonable to keep very high spreads over PLR.
