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RBI cuts bank rate, CRR by 0.25%

The Reserve Bank of India cut key interest rates at its policy review on Tuesday, reduced its projection for the gross domestic product growth for the financial year to March 2003 but retained its earlier estimate of the inflation rate.

The central bank cut the bank rate, its key interest rate signal, to 6.25 per cent from 6.5 per cent -- with effect from the close of business on Tuesday, October 29.

Announcing the Mid-term Review of the Monetary Credit Policy for 2002-03, on Tuesday, RBI Governor Bimal Jalan also announced a cut in the repo rate by 25 basis point to 5.5 per cent.

Jalan said the CRR cut would be effective from the fortnight beginning November 16 while the repo rate cut would be effective from October 30.

"In nominal as well as in real terms, it is reasonable to observe that the bank rate, call money rates as well as yields on government securities are now quite reasonable," the RBI said in the statement of its mid-year Monetary Policy review.

It lowered its forecast for GDP growth for the financial year to 5.0-5.5 per cent from its earlier estimate of 6.0-6.5 per cent, saying the government's borrowing programme might be impacted by lower growth.

It, however, retained its earlier estimate of the inflation rate for the year at around four per cent.

The central bank also lowered the repo rate, the short-term benchmark, to 5.5 per cent from 5.75 per cent, with effect from Wednesday, October 30.

It cut the cash reserve ratio, the proportion of deposits that banks must keep in cash with the central bank, to 4.75 per cent from five per cent, with effect from November 16, 2002.

The central bank said it would keep the bank rate steady until the end of the financial year unless circumstances changed.

Presenting a comprehensive monetary report for the second half before the chairmen and top executives from commercial banks, Jalan said, there is no further scope of reducing the bank rate from the present level considering the ''quite comfortable liquidity condition in the system''.

''No useful purpose is likely to be served by further reduction in the bank rate in the near future,'' Jalan said.

While the present level of the bank rate is the lowest since 1973, the CRR had been reduced by as much as 3.75 per cent over the last two years.

Jalan has also proposed to pay interest on eligible CRR balances on a monthly basis with effect from April 2003.

He said inflation would remain benign around four per cent despite drought and pressures on oil prices and RBI would continue with the Monetary Policy as announced in April for the remaining period of the year.

Jalan said India's foreign exchange reserves have been comfortable at present and consistent with the rate of growth.

Addressing the bankers, Jalan said the reduction in the GDP estimate was mainly due to poor rainfall in some parts of the country, and added, the production of the foodgrains this year would be lower than the last year by about five per cent. ''There are signs of recovery in the industrial production during the first half of the year,'' he said.

On bank credit, he said that excluding the impact of mergers, the scheduled commercial bank credit grew by 6.6 per cent up to October 4 as against 6.8 per cent in the corresponding period last year.

Food credit declined by Rs 800 crore (Rs 8 billion) in contrast to an increase of Rs 10,200 crore (Rs 102 billion) in the previous year on account of lower procurement and high offtake of foodgrains.

The growth in non-food credit was higher at 7.4 per cent as compared to 5.2 per cent in the same period last year, indicating a better outlook for industrial growth.

Outlining the positive growth prospects in exports as well as foreign exchange reserves, the Governor reiterated that the central bank would continue to provide adequate liquidity to meet credit growth and support investment demand in the economy while continuing a vigil on movements in the price level.

He also emphasised the role the apex bank plays in the policy of active demand management of liquidity through open market operation and the use of policy instruments to impart greater flexibility to the interest rate structure in the medium term.

Referring to statutory liquidity ratio of regional rural banks, RBI has proposed that SLR holdings of these entities in the form of deposits with sponsor banks maturing beyond March 31, 2003, may be allowed to be retained till maturity.

Although deposits with sponsor banks contracted before April 30, 2002, would be reckoned for SLR purpose till maturity, RRBs are advised to achieve the target of maintaining 25 per cent SLR in government securities out of the maturity proceeds of such deposits with sponsor banks as well as from their incremental public deposits at the earliest.

On the interest rate policy, the apex bank said in order to further improve flexibility, banks have been given freedom to decide the period of reset on variable rate deposits.

Banks are also encouraged to review both their prime lending rate and spreads and align spread within reasonable limits around PLR subject to approval of their boards.

RBI also proposes to liberalise interest rates on export credit in rupee terms in two phases in a bid to increase flow of credit to the export sector and encourage competition among banks.

In the first phase, the ceiling rate on prime lending rate (PLR plus 0.5 per centage point on pre-shipment credit beyond 180 days upto 270 days and post shipment credit beyond 90 days upto 180 days) would be deregulated from May 1, 2003.

Jalan said, banks would have freedom to charge PLR or sub-PLR rates subject to approval of their boards.

In the second phase, the rates on pre-shipment credit upto 180 days and post-shipment credit upto 90 days should be discontinued to encourage greater competition on a date to be announced later.

On repayment of export credit, the repayment/payment of pre-shipment credit would be permitted, subject to mutual agreement between the exporter and the banker. Balances held in Exchange Earnings Foreign Currency account of the exporter can be used.

On interest rate on deposits by co-operative banks/RRBs and local area banks, RBI said sponsor banks are encouraged not to pay interest on the current accounts maintained by the regional rural banks with them.

Co-operative banks are encouraged not to pay interest on current accounts. RRBs/LABs and co-operative banks have also been encouraged not to pay any additional interest on the savings bank accounts over and above what was payable by commercial banks, Jalan said.

With a view to provide more flexibility for pricing of certificate of deposit and to give additional choice to both investors and issuers, RBI said banks and financial institutions may issue CDs on floating rate basis provided the methodology of computing the floating rate was objective, transparent and market-based.

RBI has also proposed to set up a working group with appropriate representations from the market to look into the possible ways of extending types of derivatives, that were available in foreign currency segment to rupee derivaties.

The group would also review the guidelines for over the counter rupee derivatives in India and suggest further developments in this market.

Referring to rationalisation of standing facilities, the governor has proposed apportionment of normal and back- stop facilities to one-half (50:50) each from the fortnight beginning November 16 as against the present ratio (67:33).

Jalan said in order to improve credit delivery to the priority sector and in particular agriculture, it has been proposed that the limit of advances granted to dealers in drip irrigation/sprinkler irrigation system/ agricultural machinery, located in rural/semi-urban areas is being doubled to Rs 20 lakh (Rs 2 million).

RBI has also proposed to double the existing limit of Rs 10 lakh (Rs 1 million) without any ceiling for working capital in case of small business and weaker sections.

The individual credit limit to artisans, village and cottage industries has been enhanced to Rs 50,000 from Rs 25,000. The limits would be under the overall limit of 25 per cent advances to weaker sections under priority sector or 10 per cent of net bank credit.

Jalan has also proposed to increase the existing limit of housing loans for repairing damaged houses from Rs 50,000 to Rs 100,000 in rural and semi-urban areas and to Rs 200,000 in urban areas.

Considering the fact that the recovery rate has been very high in respect of banks' advances to self help groups, the apex bank has proposed that unsecured advances given by banks to self-help groups against group guarantees would be excluded for the purpose of computation of the prudential norms on unsecured guarantees and advances until further notice.

This matter would be reviewed after a year in the light of growth in aggregate unsecured advances, and the recovery performance of advances to SHGs, he added.

Additional inputs: Reuters & UNI

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