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RBI pledges cheap credit for industrial growth

India's central bank said on Thursday that it was optimistic that interest rates could be kept low in the coming fiscal year to ensure continued industrial growth, but sounded alarm bells over the fiscal deficit.

Unveiling the Reserve Bank of India's macroeconomic review of the financial year ending March 31 and its credit policy for 2000-2001, RBI Governor Bimal Jalan also stressed that there was no "quick fix" to enable further reductions in bank lending rates.

"An important objective of monetary policy in the current year is to provide sufficient credit for growth while ensuring that there is no emergence of inflationary pressures on this account," Jalan said.

"On current assessment, the prospects for achieving these objectives look reasonably promising."

The RBI predicted national economic growth of 6.5-7.0 percent in fiscal 2000-2001, with a current account deficit below two percent of GDP.

Jalan said the central bank would continue with its current monetary policy to ensure that all "legitimate requirements" for bank credit were met, while guarding against the emergence of inflationary pressures due to excess demand.

"Towards this objective, the RBI will continue its policy of active management of liquidity, including two-way sale and purchase of treasury bills, and reduction in cash reserve ratio, or CRR, as and when required." (CRR = the fortnightly cash balances maintained by commercial banks with the central bank.)

The central bank cut interest rates last month and increased liquidity by lowering banks' CRR.

Jalan acknowledged that interest rate reductions in the past year had not kept pace with the decline in inflation but argued that further rate cuts held risks.

"While much greater flexibility in the structure of interest rates in tune with changes in the inflationary environment is desirable, there is no quick fix solution to engineer a sharp fall in nominal deposit and lending rates of banks," Jalan said.

Prime lending rates charged by India's top state-run banks range between 11 and 12 percent.

Insisting that decisions to cut rates lay "entirely within the purview" of the individual banks rather than the RBI, Jalan said any further decline in lending rates would require "vigorous action" by banks to reduce transaction costs, improve risk management and weed out non-performing assets.

Jalan said "concerted action" was also required to move forward with financial reforms in a competitive environment, coupled with a reduction in the government's fiscal deficit.

India's fiscal deficit was estimated at 5.6 percent of gross domestic product for the fiscal year just ended, well above the budgeted target of 4.0 percent.

"Such high levels of fiscal deficits are not sustainable over the medium term," Jalan said, adding that it was of "utmost importance" to develop a national consensus on an "effective and time bound programme" to reduce the deficit.

The RBI predicted national economic growth of 6.5-7.0 percent in fiscal 2000-2001, with a current account deficit below two percent of GDP.

The RBI said it would reduce the minimum daily cash reserve requirement of banks to 65 percent from 85 percent starting May 6. However, the bank rate and repo rate were unchanged.

Ramesh Sobti, country head of ABN AMRO Bank said he welcomed Jalan's statement.

"We did not expect any interest rate cut at this stage, and the measures announced will definitely allow more liquidity in the market," Sobti said.

Share prices on the Bombay Stock Exchange closed 2.4 percent down at 4,679.63 points, although dealers said the RBI statement was overshadowed by concerns over reaction to the release of US economic data later in the day.

India's premier trade body, the Confederation of Indian Industry, said in a statement that the RBI policy would help "carry forward the process of financial sector reforms and help develop money and debt markets."