RBI keen on stable rate regime

In fact, the prices of foodgrains declined by 5.44 per cent. On supply side, stock of foodgrains at the end of August 2000 were at a comfortable level of 40.8 million tonnes. The low rate of inflation in `primary articles’ and `manufactured products’ combined with comfortable stocks of foodgrains are sources of comfort in the management of the overall inflationary environment.

"M3 growth as on September 22, 2000, was 13.6 per cent, which was also in line with the projected growth of 15 per cent envisaged in the April policy statement and thus, as of now, no undue pressure from the demand side is anticipated. However, as mentioned earlier, the external outlook principally in respect of crude oil prices, remains high uncertain and is a cause of concern," RBI said.

"Taking the above factors as well as the government’s borrowing requirements into account, as per present indications, liquidity conditions are likely to remain adequate during the rest of the year. The banking system is not expected to face any difficulty in meeting fully the demand for commercial credit from industrial and other sectors. The RBI also stands ready to provide appropriate liquidity through its LAF as necessary in order to manage the overall liquidity situation in the economy," RBI said.

On the Liquidity Adjustment Facility (LAF), RBI noted: "In the last four months – the LAF introduced since June 5, 2000 – has been effectively used to influence short-term interest rates by modulating day-to-day liquidity conditions and to contain volatility in foreign exchange market. For a few weeks, the repo rates were increased sharply and remained high."

In recent times, repos rates have been brought down to a more reasonable level. The LAF would continue to be operated in a flexible manner, both in terms of the applicable rates and tenors, in keeping with the developments in financial markets. "It may, however, be mentioned that the full diffectiveness of the LAF is at present constrained by the automatic additional liquidity available through refinance and liquidity support facilities to banks and primary dealers," RBI said.

Mixed reaction: Corporate India today gave a mixed verdict on the mid-term credit policy announced by RBI saying the measures would improve liquidity in the money market, but cut in interest rates and CRR was required to boost growth.

The RBI announcement of allowing banks to invest up to five per cent of their outstanding advances in shares, restoration of Exchange Earners Foreign Currency (EEFC) Account facility and extension of bills discounting facility to services sector were widely welcomed. However, no announcement on reduction in bank interest rate and CRR dampened the spirit.

Allowing non-banks to lend in the call money market would go a long way in pumping the much-needed funds into the call money market and reducing the call money rates, Confederation of Indian Industry (CII) said.

Welcoming the move to form a self-regulatory organisation (SRO) and tighter disclosure norms for non-banking financial corporations, CII said other issues including facilitating debt recovery for NBFCs had not been adequately addressed.

FICCI said that norms for NBFCs should be modified further as the present norms included even those NBFCs which were not accepting the deposits. On the other hand, Assocham suggested reduction in interest rates and CRR. Assocham President Shekhar Bajaj wanted banks to bring down Statutory Liquidity Ratio (SLR) to the mandated rate of 25 per cent to improve availability of funds to the industry.