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Tougher norms for banks seen in new RBI monetary policy

The Reserve Bank of India is widely expected to batten down hatches with tougher regulation for the scandal-hit banking sector when it presents its annual monetary and credit policy on Thursday.

A scandal uncovered last month, in which it was alleged that for the second time in a decade bank funds were used illegally to drive up share prices, has caused losses to some banks after a stock market collapse.

"The thinking seems to be that if banks can't handle autonomy, then the central bank will do micro management for them," said a senior banker.

That would represent at least a partial reversal of banking sector deregulation begun in the 1990s as part of India's economic reforms.

On the cards are central bank imposed limits on commercial bank lending to brokers and capital adequacy norms for co-operative banks, which were allegedly the main conduits for bank funds to the share market in the latest scandal.

NO RATE CUTS

Reserve Bank of India, Governor, Bimal Jalan has already said the policy will not make any changes in the benchmark bank rate -- the rate at which the central bank lends to commercial banks -- or in banks' cash reserve ratio.

This sharply reduces the scope for a cut in bank lending rates, which industry has been clamouring for and which some analysts see as vital to revive demand in a sluggish economy.

A weak rupee, which hit a new lifetime low on Tuesday, reduces the central bank's leeway to ease its monetary policy and some analysts fear if the currency market volatility is prolonged, it could well lead to a policy tightening.

Last year the RBI was forced to reverse rate cuts and tighten its monetary purse strings after the rupee came under pressure from high global crude oil prices and a slowdown in foreign capital inflows.

SLOWING ECONOMY

The policy for the year which began on April 1 is being presented against the background of a slowing economy.

GDP growth slowed to 5.7 per cent in the third quarter of 2000/01 (April-March) from 6.0 per cent a year earlier. And latest data show both exports and industry did poorly in February, suggesting any economic recovery is some way away.

Against this background a monetary policy that has ruled out rate cuts will not offer much cheer to businessmen or markets.

"The issue is what can the RBI's policy do to stimulate the economy," said M R Madhavan, research head at Bank of America in Bombay.

"At this stage, I do not see much that can be done. The RBI has already cut its bank rate twice in 2001 and what they can now do is to make sure that there is enough supply of funds within the system to meet any possible demand," he said.

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