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RBI cuts interest rate, relaxes monetary policy to boost growth

Prime Minister Gujral promised top businessmen last week that the business climate would change dramatically in seven days time.

Indication of what he meant came when Reserve Bank of India Governor Chakravarty Rangarajan announced the central bank's credit policy for the second half of fiscal 1997-98.

ln an attempt to expand the lendable resources of banks and reduce the cost of funds, the RBI's monetary and credit policy includes a two percentage point reduction in the cash reserve ratio in phases, a one percentage point cut in bank rates, deregulation of interest rates on domestic term deposits, rationalisation of the statutory liquidity ratio, and freeing the prime lending rate for individual banks on term loans of three years and above.

Announcing the policy at a meeting with chairmen of commercial banks in Bombay on Tuesday, Dr Rangarajan said the RBI strategy was a multi-pronged approach to monetary management, which included a further deepening and integration of financial markets and the carrying forward of the reform process.

Deregulation of interest rates and the reduction in CRR would give banks sufficient freedom in managing their portfolios to optimise profits and productivity, the RBI governor said.

As the rate of inflation continues to be low, the RBI, with effect from close of business on Tuesday, has reduced the bank rate by one percentage point to 9 per cent per annum.

At the same time, it has brought down the CRR by 2 percentage points from 10 per cent to 8 per cent in eight phases of 0.25 percentage point each with effect from the fortnight beginning October 25.

The latter measure will pump in an additional Rs 96 billion to the banking industry, with Rs 12 billion for each phase of CRR reduction.

However, the governor indicated that he would review the impact of the CRR cut before clearing the reduction of CRR for February and March 1998.

To provide a better return on cash balances maintained with the RBI under CRR, the central bank announced a uniform interest rate of 4 per cent per annum on all eligible cash balances with effect from October 25.

All commercial banks are at present required to maintain a statutory liquidity ratio based on multiple prescriptions. With effect from October 25, the RBI has fixed a uniform SLR of 25 per cent on the banks entire net demand, and time liabilities which is the minimum stipulated under the Banking Regulation Act 1949.

Effective from Wednesday, banks will be free to fix their own interest rates on domestic term deposits of 30 days and over.

However, banks should obtain prior approval from their respective boards for the interest rates they will offer on deposits of various maturities, Dr Rangarajan said. He suggested that banks may offer a fixed rate on deposits or a floating rate clearly linked to an anchor rate. Banks may offer new rates on fresh deposits and on renewal of maturing deposits.

The RBI also provided further flexibility to banks by allowing them to offer interest on deposits under the Foreign Currency Non-Resident account scheme at rates not more than the London InterBank Overnight Rate -- Libor -- prevailing on the last working day of the previous week for the relevant maturity and currency.

In respect of borrowers in the bank in the credit slab of over Rs 25,000 and up to Rs 200,000, it was decided by RBI to stipulate the lending rate to not exceed 13.5 per cent per annum instead of the existing fixed rate of 13.5 per cent. Effective Wednesday, banks may also charge interest rate for credit limits of over Rs 25,000 to up to Rs 200,000 not exceeding 13.5 per cent.

Banks were also given the freedom to fix separate lending rates for cash credit and loans and in term of loans of 3 years and above.

The RBI has decided to permit banks to announce separate prime lending rate with approval of their boards. Rationalising the interest rates on rupee export credit, the RBI, with effect from Wednesday, reduced the rates on pre-shipment rupee export credit up to 180 days from 13 to 12 per cent and on credit beyond 180 days and up to 270 days, the rates would be at 14 per cent as against the previous rate of 15 per cent.

On post-shipment rupee export credit, it was decided that banks should charge an interest rate of 13 per cent per annum only for the period beyond 90 days and not from the date of advance.

The RBI also gave freedom to the banks to offer loans against foreign currency and national currency non-residents's deposits, depending on the availability of funds and the rate of interest.

RELATED REPORTS:
Industrial production will go up, says governor
Bid to widen investors' participation
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Business chambers welcome policy

EXTERNAL LINK:
The Reserve Bank of India busy-season credit policy