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Credit and Monetary Policy: RBI seeks to rationalise rates, stabilise liquidity and develop vibrant money market

The Reserve Bank of India today announced the first half of its Credit and Monetary Policy for 1999-2000.

The policy contains measures to further rationalise interest rates, provide reasonable liquidity for the growth of the economy and carry forward the reform process towards developing a vibrant and deep money market.

The RBI has reduced the Cash Reserve Ratio to be maintained by the commercial banks by half a per cent to 10 per cent, effective May 8. The reduction in CRR is expected to release Rs 32.50 billion into the banking system.

The growth in money supply for 1999-2000 has been projected at 16 per cent from 15.5 per cent last year. Justifying the higher target, the RBI said that the decision takes into account the government's market borrowing requirements.

An unduly restrictive credit policy could militate against the need of the enhanced growth prospects. The range is well below the actual M3 growth in each of the last three years. (M1: A measure of money supply which includes all coins and notes in circulation, and personal current accounts. M3: A measure of money supply, including those covered by M2 -- a measure of money, supply, including M1, plus personal deposit accounts -- plus government deposits and deposits in currencies other than rupee.)

The central bank has withdrawn the general refinance facility with immediate effect. It will be replaced by a Collateralised Lending Facility up to 0.25 per cent of a forthnightly average outstanding aggregate deposit in 1997-98, which will be available for two weeks at the bank rate.

An Additional Collateralised Lending Facility for an equilavalent amount of CLF will also be available at the bank rate less 2 per cent. The export credit refinance facility will be eligible for commercial banks at the bank rate of 8 per cent per annum).

The RBI will introduce an interim liquidity adjustment facility through repos and lending against the collateral of government securities.

The CLF and ACLF availed for periods beyond two weeks will attract the two per cent penal rate for an additional two week period. There will be a cooling period of two weeks thereafter. The current restrictions on participation in money markets during the period that such facilities are availed of, have been withdrawn to facilitate systemic adjustment in liquidity.

As a move towards further rationalising interest rates and giving banks more freedom to set the lending and deposit rates, the RBI has allowed banks to operate tenor-linked Prime Lending Rate for different maturities.

To enable borrowers availing project finance fixed interest rates on their term loans, the RBI has permitted banks to offer fixed rate loans subject to conformity to assest-liability management guidelines.

To remove the anamoly of interest rate on advances based on PLR being lower than the deposit rates, the central bank has stated that in such cases, advances to depositors against fixed deposits can be made by banks without reference to the cieling on PLR and banks can charge suitable interest rates which will be applicable for both domestic and non-resident deposits.

To enable banks to adopt prudent accounting standards and to move towards mark-to-market valuation of the investment portfolio, banks will have to classify a minimum of 75 per cent of the securities as current investments from the year ending March 31, 2000.

To avoid the high level of short folding among banks and financial institutions of the subordinated debt instruments issued by banks, the central bank has put a ceiling of 10 per cent of the banks' and the FIs' total capital for investment in Tier II bonds issued by other banks.

The prescribed waiting period of two years during which banks have to treat loans that have been renegotiated or rescheduled after commencement of production as substandard, has been reduced to one year. This relaxation is subject to the rider that the interest and installment of loans have been serviced regularly as per the terms of rescheduling.

The RBI has proposed to issue guidelines to finacial institutions also. The draft of the proposed guidelines would be sent separately to FIs later. To facilitate the exit of public financial institutions like the UTI, the LIC and the IDBI and other non-bank participants from the call money market, these entities can from now on access short-term liquidity through repos.

(Repo: repurchase agreements or ready forward deals, a secured short term -- usually 15-day -- loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term it will buy back the securities at a slightly higher price, the difference in price representing the interest.) UNI

RBI Governor Bimal Jalan's policy statement

April 20, 1999: The RBI's Credit and Monetary Policy

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