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April 29, 1998
COMMENTARY
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Jalan does not cut CRR in first credit policy
Jalan said all other policy measures including the level of Cash Reserve Ratio -- CRR -- would continue as before. ''So far as the CRR is concerned there will be no change at this point of time as the liquidity condition is quiet comfortable,'' he said. ''Further changes in the CRR would be announced during the course of the year in light of the evolving circumstances,'' the RBI governor added. He also clarified that changes in the bank rate, Repos rate, access to refinance and other measures may be announced from time to time and not necessarily at the time of the bi-annual credit policy statement. While the bank rate has been reduced from 10 to 9 per cent with immediate effect, export credit refinance will be restored to 100 per cent. The increase in outstanding export credit eligible for refinance over the level of such credit as on February 16, 1996 with effect from the fortnight beginning May 9, 1998. Interest rates on pre-shipment export credit up to 180 days has been reduced from the existing 12 per cent to 11 per cent with immediate effect. Interest rates against incentive receivables from government covered by ECGC guarantee in respect of pre-shipment credit up to 90 days has been reduced from the existing 12 per cent to 11 per cent with immediate effect. The RBI also decided to deepen further the government securities and money markets and propose to introduce one day Repos to absorb liquidity into the system, providing greater freedom to banks in respect of several aspects of their deposit and lending operations. The central bank allowed banks to increase their advances from a ceiling of Rs 1 million to Rs 2 million against shares and debentures to individuals for meeting contingencies and needs of personal nature. The minimum margin prescription against dematerialised shares also stands reduced to 25 per cent from 50 per cent. Later addressing the chairmen and senior executives of commercial banks at the RBI headquarters in Bombay, the governor expressed concern over the slowdown in industrial growth which became more persistent and widespread than expected in the current year. He advised the bankers to plan their credit operations on the assumption that barring unexpected developments on the price front or in the foreign exchange markets, sufficient liquidity would be available in the current year to finance additional production as per normal banking norms. ''The prevailing liquidity conditions are comfortable and this is reflected in the large outstandings of Repos with the RBI which are readily available to the banking system. At the end of business on April 27, such Repos amounted to Rs 85.29 billion,'' he said. Expressing satisfaction over the annual rate of inflation at around 4.8 to 5 per cent, Jalan said the Indian economy has the potential of attaining a growth rate of 7 to 8 per cent per annum over the medium term. For the immediate future, a growth rate of 6.5 to 7 per cent needs to be achieved in order to realise the potential. An increase in the annual inflation rate beyond 5 to 6 per cent would be neither desirable from the perspective of growth nor beneficial from the societal point of view. Keeping these considerations in view, he said, a reasonable target for M-3 growth in 1998-99 would be 15 to 15.5 per cent. Discussing the South-East Asian currency crisis, Jalan observed there could be no room for complacency in regard to the developments that might adversely affect exchange markets. While closer links among different segments of financial markets are desirable for improving allocative efficiency, they also pose new challenges for monetary management. According to him, the short term economic objectives for the RBI are the need to accelerate industrial investment and output in the economy, maintenance of low rates of inflation, continued pursuit of financial reform, reduction in interest rates and improvement in credit delivery mechanisms particularly for agriculture and medium and small sectors.
Emphasising greater importance to structural measures in the RBI's credit policy at the beginning of the financial year, the governor said the medium measures were expected to continue over the medium term, the short term measures were subject to changes at short norice in light of actual development and emerging external market conditions. He also called for an exercise to develop and adopt a multiple indicator approach wherein interest rates or rates of return in different markets (money, capital and government securities) along with data as on currency, credit extended by banks and financial institutions, fiscal position, trade, capital flows, inflation rate, exchange rate, refinancing and transactions in foreign exchange available on high frequency basis are juxtaposed with output for drawing policy perspectives. This would help the bank to evolve over time a model for estimating liquidity in the economy in the performance of its day-to-day operations.
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Reserve Bank of India Governor Bimal Jalan announced his first monetary and credit policy on Wednesday morning. The credit policy, which will be valid for the first
half of fiscal 1998-99, proposed a one percentage point cut in the bank rate to 9 per
cent, restoration of export credit refinance to 100 per cent
from the prevailing 50 per cent and a one percentage point
reduction in interest rates on pre-shipment export credit.
Among developments that have to be taken
into account while formulating the first half monetary policy are:
higher than the projected growth of money supply in relation to
growth in Gross Domestic Product in 1997-98, substantial
increase in financial flows from banks to the corporate sector
despite a slowdown in industrial growth, higher market borrowing
requirements of the Union government and continued uncertainty in
external currency and product markets.