Credit Policy
Model of triumphant pragmatism
THE RBI Governor, Dr Bimal Jalan, has surprised most observers, especially the present writer, by unexpectedly cutting the bank rate, albeit by just 50 basis points. He has, however, recognised that banks are constrained by the costs of raising deposits,
which already stand high at an average of 7 per cent or more. Operating expenses worked out at 2.5-3 per cent, putting pressure on the required spread over cost of funds.
No point just keeping up with Joneses
ACCORDING to the Finance Ministry, the index of industrial production during April-July 2001-2002 increased just 2.3 per cent, compared to 5.9 per cent during the previous similar period. The manufacturing growth rate was just 2.6 per cent (6.2 per cent
for the previous year's similar period), and electricity growth was just 2.7 per cent (4.4 per cent). The most worrisome factor is the negative growth rate in the capital goods sector -6.1 per cent (4.5 per cent).
Surprise for banks, boost for industry
THE RBI Governor, Dr Bimal Jalan, has brought in a surprise to the banking system when he announced cut in Cash Revenue Ratio (CRR) by 200 basis points from 7.5 per cent to 5.5 per cent and reduced the bank rate over 50 basis points. Such reduction in CR
R will release liquidity of around Rs 8,000 crore to the lendable resources of the banks.
A bold response
AGAINST the unfavourable industrial and export situation, the RBI has reduced the GDP growth target to 5-6 per cent from 6-6.5 per cent. Nevertheless, the fundamentals of the economy, as reflected in moderate inflation, stable and low interest rates, hig
h foreign exchange reserves, large foodgrain stocks and competitive advantage of information technology-related industries, are strong.
Some credits, some debits
THE reduction in CRR by 200 bp was much beyond what the market anticipated. The estimate is this may result in easing the liquidity by around Rs 8,000 crore. Nevertheless, the proposal to remove all exemptions on NRI deposits from the purview of CRR comp
utation, to avoid operational complexities, may cause some hardship to banks with substantially high percentage of NRI deposits. For the Kerala-based banks, with their 35-45 per cent deposits from NRIs, the CRR component in actual terms may even go up, d
espite the 2 per cent cut in the rate.
Looking for derivative growth
It has not been our practice in the software services industry, traditionally a cash surplus industry, to pay attention to the credit policy of the Reserve Bank of India. However, it is a different scenario now with global markets appearing a bit shaky.
Therefore, we have been looking to the growth of the Indian market for our own services, thus increasing our stakes here.
Positive signals on available resources
THE latest edition of the Credit Policy has special significance considering the present state of the economy, the recessionary trends world over, and the recent unprecedented global events. The successive interest rate cuts announced by the Fed in the l
ast few months had raised expectations from this policy.
Will noises translate into action?
NO RBI Governor's job is enviable, especially when it comes to ensuring the effectiveness of monetary polices. The autonomy of the RBI and the Government's fiscal responsibility (or the lack of it), have, more often than not, worked at cross-purposes tha
n complement the monetary policies. The push towards lowering interest rates is a case in point about the kind of pressures the Government exerts on the RBI.
Has Jalan reached the end of the road?
THE RBI Governor, Dr Bimal Jalan, has travelled the full yard by giving what the market was asking for. He could not have given more. In fact, after the full yard, there is a solid stonewall. Fortunately, this stonewall is fully illuminated. Nevertheless
, it is the end of the road for effectiveness of Monetary Policy and the engine is fast losing steam.
Banks' bottomline may come under strain
THE sharp 2 per cent reduction in the CRR and the 0.5 per cent cut in the Bank Rate signal that a soft interest-rate regime will continue, at least in the medium term. As a fallout, banks may be forced to lower interest rates on both deposits and credit.
And, consequently, their bottomline may come under pressure. This may, of course, spur investments. But to get the desired effect, the Government will have to come out with a package to create a conducive environment for growth.
Editorial
RBI's best
Shedding all the conservative inhibitions a cental banker is heir to in troubled times, Dr. Bimal Jalan, RBI governor, has decided to risk fast paced growth by sharply cutting fund costs. Not for him anymore the rather strange logic of making the Mid-ter
m Review of Monetary and Credit Policy for 2001-2002 a non-event. Staring at an unappetising menu of domestic and external uncertainties, the RBI has wised up to marking down the Bank Rate to 6.5 per cent from 7 per cent and the CRR from 7.5 per cent to
5.5 per cent in two stages, however tenous or strong be the links between interest rates and growth. With GDP growth estimates for the current year placed down from 6-6.5 per cent to 5-6 per cent the RBI has taken upon itself the tough task of bringing u
p capital investment with the capital goods sector registering a negative growth of minus eight per cent in April-August 2001 as against 4.3 per cent during the same period of last year. The present environ is just proper for RBI to take the risk as infl
ation is down, current account deficit is expected to be well below 2 per cent of GDP and forex reserves are up from $ 34.9 billion on Oct. 20, 2000 to $ 45.1 billion by Oct. 19, 2001.
