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October 29, 2002 | 1207 IST 		Feedback  
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Highlights of the Credit Policy

Bimal Jalan, Governor of the Reserve Bank of India, on Tuesday announced the Mid-term Review of Monetary and Credit Policy for the second-half of the year 2002-03.

Following are the highlights of the policy:

  • The Reserve Bank of India has cut the bank rate by 0.25 per cent to 6.25 per cent effective from the close of business hours on Tuesday. It is the lowest rate since 1973.
  • RBI cut the cash reserve ratio (CRR) from 5 per cent to 4.75 per cent effective from the fortnight beginning November 16, 2002.
  • The central bank has lowered its forecast for gross domestic product (GDP) growth by one per cent from 6-6.5 per cent to 5-5.5 per cent for the current fiscal ending March 2003, despite drought conditions.
  • RBI has lowered the repo rate by 0.25 per cent to 5.50 per cent under its liquidity adjustment facility.
  • RBI liberalises interest rate on credit in rupee terms and proposes deregulation of ceiling rate of prime lending rate on pre-shipment credit effective from May 2003. Reduction in effective lending rates of banks.
  • Substantial increase in flow of bank credit to industries. Upturn in industrial production and buoyancy in exports to sustain growth.
  • Money supply (M3) contained within the projected trajectory of 14 per cent.
  • Decline in reserve money despite large increase in foreign exchange reserves and significant primary support to government borrowing programme.
  • Bulk of the government borrowing programme completed at lower interest cost and with longer maturity.
  • Inflation to remain benign around 4 per cent despite drought and pressures on oil prices.
  • Sharp reduction in interest rates on various types of government and corporate papers.
  • Reserves build up at a low effective cost without adding to external debt. The increase in reserves reflects higher remittances, quicker repatriation of export proceeds and non-debt inflows.
  • RBI to continue the monetary policy stance for 2002-03 announced in April 2002 for the remaining half of the year.
  • Monetary and prudential measures towards flexibility

CRR = Cash Reserve Ratio, the fortnightly cash balances maintained by commercial banks with the central bank.

Bank Rate = Bank Rate is the rate at which RBI allows finance to commercial banks. Normally, different types of refinance facilities by RBI to banks are linked to a Bank Rate. Bank Rate is a tool which RBI uses for short-term purposes. Any revision in Bank Rate by RBI is a signal to banks to revise deposit rates as well as Prime Lending Rate.

SLR = Statutory Liquidity Ratio. Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. These are collectively known as SLR securities. The buying and selling of these securities was the seed of the 1992 scam.

FCNR(B) Deposits. (foreign currency non resident Indian - banking deposits.)

FCNR (Foreign Currency Non-Resident Indian).

M1: A measure of money supply that 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.

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.

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