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Chidambaram appeals for calm; RBI hikes bank rate, cash reserve ratio

Chidambaram in statement noted that the correction in the exchange rate of rupee has already taken place and measures announced by the RBI will ensure that the foreign exchange market remains orderly and stable.

After the close of banks, the RBI announced a hike of two percentage point in bank rate to 11 per cent and an increase in the cash reserve ratio by 0.5 per cent to 10.5 per cent with effect from the fortnight beginning tomorrow.

The central bank also reduced the export refinance limit from hundred per cent to 50 per cent in an effort to check further slide in the exchange rate.

The finance minister also took serious note of Bharatiya Janata Party leaders statement on the role of foreign institutional investors and a lock-in period for portfolio investments. "Any talk of placing restrictions, such as a lock-in period for FIIs, is retrograde and counter-productive," Chidambaram said, and assured the FIIs that no responsible government in the future would take such a step.

Describing the pressure on rupee as the spilling over effect of turbulence in the Southeast Asian markets, the finance minister said the RBI has been maintaining a close watch on the behaviour of the rupee.

Since April last, the Indian rupee has depreciated by 11 per cent in nominal terms, while other Southeast Asian countries had seen their currencies depreciate down to 72 per cent, the finance minister pointed out.

Meanwhile, in a statement in Bombay, the RBI said its measures were taken after making a review of the current status of foreign exchange markets and also the recent international developments. It may be pointed out that on Tuesday, the Indian currency breached the Rs 40 per dollar barrier, while the Asian market crisis continues unabated.

The RBI also reduced the export refinance limit from 100 to 50 per cent of the increase in outstanding export credit eligible for refinance over the level of such credit as on February 16, 1996.

It also cut the general refinance limit from 1 per cent to 0.25 per cent of fortnightly average outstanding aggregate deposits in 1996-97.

The interest rate on fixed rate repo being announced today was also raised from 7 to 9 per cent and henceforth, the reverse repos facility would be made available to primary dealers in government securities market at bank rate on discretionary basis and subject to stipulation of conditions relating to their operations in the call money market.

It has also increase the interest rate surcharge on import finance from 15 to 30 per cent. The RBI also placed the across-the-board formal stipulation regarding maintenance of near square positions with imposition of such a stipulation for individual banks as and when warranted.

Meanwhile, reacting to the RBI's measures has been leading bankers point out that the moves would affect the flow of funds from banking sector to the industries particularly in the core sector.

Describing the measures as a reverse trend in the economic reform process, they said these measures would not serve the purpose of containing vulnerabilities in the financial sector in light of the current scenario in the foreign exchange markets and recent international developments.

Bank of Baroda Chief Economist Dr A Chakraborty said that the country was going back to a high cost economy as majority of commercial banks would now increase their prime lending rate by at least two percentage point, resulting in a high rate of borrowings from banks.

The recent trend of higher credit offtake from banks would soon dry out as the corporates would look for other cheaper sources of external commercial borrowings in the domestic markets, induced by lower interest rates.

Dr Chakraborty said that the volatility of rupee could not be curbed only through such policy measures but by improving the supply of US dollars either through higher exports realisation or through increased flow of foreign exchange which has high risk bearings.

A senior executive from the Bank of India said that the RBI action would have a cascading affect on the operation banks in India.

The hike in cash reserve ration would result in tightening the liquidity to the extend of Rs 25 billion in the banking system and this would upset their lending programme for the current quarter.

Though the RBI had given a signal of high interest regime notwithstanding the fact that the inflation rate remain stable at lower level, measures such as reduction in export refinance limit from 100 to 50 per cent would not help in bringing in foreign exchange earnings of the exporters from abroad.

"While the fundamentals in the case of India have been the strong point," said former RBI deputy governor S S Tarapore, "We cannot just relay on early warning signals because in some cases, such measures can not prevent a crisis from blowing up."

Invariably, the vulnerabilities were lodged in the financial sector and therefore, the strengthening of the financial sector should be the topmost priority in the overall economic reform process, he said.

According to sources, the majority of banks would take decision in hiking their prime lending rate and other interest rates in the next week after taking stock of the situation arising out of the RBI measures.

UNI