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Tuesday, Apr 30, 2002

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CRR cut, bank rate unchanged

By Our Special Correspondent


The RBI Governor, Bimal Jalan, announcing the credit policy in Mumbai on Monday.

MUMBAI April 29. The Reserve Bank of India is expecting the economy to grow at 6 to 6.5 per cent in 2002-03 and the rate of inflation to be slightly lower than four per cent. It has initiated measures to make the interest rate structure more flexible by encouraging depositors to convert their long-term fixed rate deposits into variable rates.

Although there is no change in the bank rate, which is an indicator of the interest rate regime, the central bank cut the cash reserve ratio (CRR) by 50 basis points from 5.5 per cent to 5 per cent. However, this reduction is being made effective from the fortnight beginning June 15, 2002, in view of the prevailing excess liquidity in the banking system. In case there is an unexpected change in liquidity conditions, the RBI may advance the effective date of reduction.

While announcing the Monetary and Credit Policy for the year 2002-03, the RBI, Bimal Jalan, said, "this policy was formulated in the backdrop of an extremely comfortable economic situation.'' He said that unless circumstances change unexpectedly, the Reserve Bank would continue to maintain the current interest rate environment with a bias towards a softer interest rate regime in the medium term. Further, he said the central bank would provide adequate liquidity to meet credit growth and support investment demand in the economy while continuing a vigil on movements in the price level.

Mr. Jalan said there was excess liquidity in the system, lower yields on fixed income securities and reduction in deposit and lending rates. "Under these circumstances, on balance, it is considered desirable to leave the bank rate unchanged,'' said Dr. Jalan, adding, "in case the overall liquidity and credit situation warrants, and inflation rate continues to remain low, a reduction in the bank rate by upto half percentage point will be considered as and when necessary.''

Mr. Jalan stressed that from the medium-term perspective, it was necessary to initiate measures to make the interest rate structure more flexible and reflective of the underlying inflationary situation. "We will move to a more flexible interest rate in future,'' he said. It would encourage introduction of a flexible interest rate system for all new deposits with reset at six-monthly intervals and also devise schemes for encouraging depositors to convert their existing long-term fixed rate past deposits into variable rate deposits.

At the same time, the fixed rate option should also be made available to depositors. However, he said it was not an opportune time to deregulate the interest rate on savings account for the present as nearly four-fifths of such savings deposits were held by households, including those in the rural and semi-urban areas.

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