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RBI leaves Bank Rate, CRR untouched

Permission to non-bank institutions to lend the call money market, new guidelines for issue of commercial papers, withdrawal of transferability period of certificate of the deposit, requirement of rating for term deposit raised by financial institution bank finance in stock market equity and shares and guidelines on categorisation and valuation of bank investment, were among the important policy decisions announced by the Reserve Bank of India in its mid-term Monetary and Credit Policy on Tuesday in Bombay.

While the central bank did not propose to make any change in monetary measures like Bank Rate, cash reserve ratio (CRR), reiterated that it would continue its policy of active of active management of liquidity through open market operation and revision in cash reserve ratio and bank rate as and when necessary.

Disclosing the policy statement before the gathering of chairmen and chief executives of commercial banks, RBI Governor Dr Bimal Jalan said that the focus of the policy was mainly on the structural measure to strengthen the financial system and improve a functioning of the various segments of the market.

The RBI also proposed to introduce further measures like fresh guidelines for constituents SGL accounts, screen-based trading in government securities, prudential norms for banks, credit exposure to individual and group borrowers and credit delivery mechanism to traders and small scale sectors.

Looking ahead to the second half of the current year Dr Jalan said there was a need for continued caution and vigilance on the external front in view of several uncertainties.

Despite the action by OPEC to increase crude oil supply and action by the US to release the more oil, international prices of crude oil continued to be very high and cast the substantial burden on the economy.

However, the governor lamented a positive outlook for Indian economy by pointing out certain favourable factors like good performance of export, favourable foreign direct investment, low level of external commercial foreign borrowing and low level of inflation in primary article and manufacturing product.

These are the sources of comfort in management of the overall economy, the RBI governor added.

Reviewing the first half economic scenario, Dr Jalan said that the real gross domestic production during 2000-01 can be placed in the range of 6 to 6.5 per cent as against the projection of 6.5 to 7 per cent indicated in the first half Monetary and Credit Policy statement (April). In the first quarter, the growth was 5.8 per cent as against 6.9 per cent in the same period last year.

While the output of foodgrains during the year is expected to remain close to that of the previous year, the industrial outlook presents a mixed picture with the growth in the first four months of the current financial year was lower at 5.4 per cent than 5.9 per cent recorded in the corresponding period of the previous year. The total buffer stock of foodgrains stood at 40.8 million tonne at the end of August, 2000, which was higher by 38.3 per cent over the stock level of 29.9 million tonnes at the end of August, 1999.

The inflation rate on a point-to-point basis as on September 23, 2000, was 6.06 per cent as against 3.20 per cent a year ago. This was mainly due to hike in cost of fuel, power and lubricants, while the consumer price index for the same period remained at 3.99 per cent as compared to 3.15 per cent in August, 1999.

The growth in money supply during the current financial year up to September 22, 2000, was 6.6 per cent as against 6.8 per cent in the same period last year. On an annual basis, the growth was lower at 13.6 per cent and the reserve bank felt that it would be contained within 15 per cent for the financial year 2000-2001.

The Reserve Bank also noticed a shift in the sources of contributing to the reserve money expansion during the year. The reserve money expansion on an annual basis was at 9.9 per cent as against 14.8 per cent in the previous year. In 1999-2000, the expansion was mainly due to increase in net foreign exchange assets and reserve bank credit to commercial sector whereas during the current financial year, so far, it was mainly due to increase in net reserve bank credit to the Union government, which went up substantially by Rs 105.88 billion during the period as against Rs 3.08 billion in the corresponding period last year.

The Reserve Bank also expressed concern over the growing fiscal deficit of the government though the deficit up to August was reported to be significantly lower at Rs 364.47 billion representing an improvement by 24.3 per cent as compared to the previous year.

However, two major uncertainties that may finally affect the budgetary outlook are the pace of progress in realising the projected receipts from divestments and the budgetary outgo to meet the shortfall in the oil pool account. It is absolutely essential not only to contain but also to reduce the borrowing programme of the government since such action would make a positive contribution to keeping the interest rate outlook positive and stable, Dr Jalan observed.

There was also significant pick up in the bank credit which expanded by 7.1 per cent up to September 22, as against an increase of 3.2 per cent in the previous year. Non-food bank credit rose by six per cent as against an increase of 2.3 per cent in the previous year. The expansion of credit from banks to commercial sector has occurred despite some evidence of deceleration in the growth rate of industrial output in the last few months, the governor said.

He said that the growth in bank credit was mainly due to improvement of stocks of fertilisers, sugar, petroleum and automobiles and also pick up in infrastructure sector and export growth. It was always necessary that a strong framework is put in place to build up positive expectations on the fiscal front and he hoped that the proposed fiscal responsibility legislation would address the crucial issues of the economy in future.

UNI

SEE ALSO:

Monetary & Credit Policy 2000-2001 (Second Half)

RBI's Credit and Monetary Policy 2000-2001 (First Half)

RBI's Credit and Monetary Policy 1999-2000

Money

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