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Journalism of Courage
MUMBAI, APR 27: The Reserve Bank of India (RBI) on Thursday left key interest rates unchanged and instead focussed on widening and deepening of the debt and money markets in its monetary and credit policy for the year 2000-01. The central bank, while predicting a GDP growth of 6.5 to 7 per cent for the current year, said it would continue its easy money policy so that the low interest rates can help industrial recovery and allow the government to raise funds at cheap rates.
As expected, the Reserve Bank of India (RBI) governor Bimal Jalan did not touch the interest rates but used the policy statement to issue the final guidelines on banks’ entry into the insurance sector and small doses of reforms in the financial market. “It is necessary to ensure that the interest rate conditions remain favourable to industrial recovery and that liquidity conditions do not give rise to adverse inflationary expectations. The monetary policy has to play a balancing role in this context,” he said.
The RBI had earlier this month cut the bank rate, cash reserve ratio and repo rate, leading to a fall in interest rates across the board. This has taken the sting out of Thursday’s credit policy.
While predicting a good growth in GDP, the RBI warned that there was a need to keep a close watch on inflation. “In the past three weeks, even after eliminating the effect of the change in the base year of the wholesale price index, the inflation rate has been somewhat rising,” the RBI said. “We intend to continue the current stance of monetary policy to ensure that all legitimate requirements for bank credit are met while guarding against any emergence of inflationary pressures created due to excess demand. Towards this objective, it will continue its policy of active management of liquidity through open market operations and reduction in cash reserve ratio as and when required,” Jalan said.
"Some states have been affected by severe droughts. On the inflation front, therefore, there is need for continuous vigilance and caution," he said. India’s year-on-year inflation rate measured by the wholesale price index rose to 4.64 per cent in the week ended April 8 from 3.74 per cent on March 18.
The RBI has proposed to reduce commercial banks’ requirement of a minimum cash reserve ratio daily balance to 65 per cent from the current 85 per cent with effect from May 6. "This is expected to result in smoother adjustment of liquidity between surplus and deficit units and enable better cash management by banks," the RBI said. The move is expected to give banks more flexibility in managing their cash balances during a reporting period. Some bankers had expected the central bank to set a timetable for a phased reduction in the CRR. The RBI left the CRR unchanged at eight per cent. “We would reduce banks’ CRR as and when required outside the monetary policy,” Jalan said.
Unveiling the norms for bank’s entry into the insurance sector, the RBI said that banks having a minimum net worth of Rs 500 crore and satisfying other criteria in regard to capital adequacy and profitability will be allowed to undertake the insurance business through joint ventures on risk participation basis. However, the RBI capped banks’ equity in insurance joint ventures at 50 per cent. It also said the capital adequacy of banks should not be less than 10 per cent as on March 31, 2000. The other norms laid down by RBI were that the level of non-performing assets should be reasonable and that the bank should have a net profit for the last three continuous years.
In a significant announcement, the RBI said it is introducing liquidity adjustment facility (LAF) on the line of the Narasimham committee recommendations on financial sector reforms. The ALF, which replaces the interim liquidity adjustment facility (ILAF) will strengthen the role of the central banks as a lender of the lat resort and help develop a short term rupee yield curve. The old system had guaranteed banks and primary dealers refinance at fixed rates, diminishing the central bank’s role as a lender of the last resort. The LAF — to be introduced in three stages — will include repo auctions and reverse repo auctions.
In a bid to provide operational flexibility, the RBI has allowed banks to offer differential interest rates on NRE/FCNR(B) deposits on the line of domestic deposits. The stipulation on fixed rate loan only on project loans has also been removed and the bank have been allowed to offer all loans on fixed or floating rates. It has also liberalised the export credit refinance facility by removing the base date of February 16, 1996 and making the outstanding export credit as the basis for fixing refinance limits. This will enable banks to use rediscounting of export bills without any reduction in refinance limits.
The financial institutions have been given the freedom to fix interest rates on term deposits without reference to State Bank of India rates. The cap on the coupon on the institutional bond offerings has also been lifted. Jalan also said the institutions can transform themselves into banks provided they satisfy the prudential norms applicable to banks. On the prudential norms front, the RBI has asked banks to build in the risk weighted components of their subsidiaries into their own balance sheets. The additional capital required may be provided in the banks’ books in phases beginning from fiscal 2001.
