The Hindu : No change in Bank Rate, CRR

Online edition of India's National Newspaper
Tuesday, Nov 04, 2003

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No change in Bank Rate, CRR

By Oommen A. Ninan

MUMBAI Nov. 3. In his maiden policy announcement as Governor of the Reserve Bank of India, Y. Venugopal Reddy today preferred not to cut any rate — Bank Rate, Repo Rates and Cash Reserve Ratio — allowing the central bank's continuity of the softer interest rate regime.

The implication is two fold: one, Mr. Reddy believes in continuity under which monetary measures

such as Bank Rate cut can be resorted to as and when circumstances warrant. Two, inflationary expectations, although positive, can never be ignored. So for the common man, while there is an abundance of liquidity, the significant gain has only been in areas such as housing loan and not in the aggregate. That is why the RBI feels that the credit delivery system has to be further improved to benefit the small and medium industries and agriculture.

Announcing the Mid-Term Review of the Monetary and Credit Policy for 2003-04, Mr. Reddy revised the Gross Domestic Product (GDP) growth to 6.5 to 7 per cent for 2003-04 against the six per cent projected in April last, taking into account the performance and spatial distribution of the southwest monsoon and assuming the continuance of good performance by industry and some acceleration in exports.

"Our review of the economy indicates a very positive development in the macro level and the investment climate has improved. However, the flow of credit is slightly sluggish," he said. The annual rate of inflation was likely to be in the range of 4 to 4.5 per cent with a possible downward bias compared to the 5 to 5.5 per cent envisaged during the Annual Policy announcement in April.

Mr. Reddy did not announce any change in the Bank Rate and the Cash Reserve Ratio as expected by some sections of the financial markets. The Bank Rate, an orthodox interest rate signalling device — which plays a role in the pricing of loans by banks — remains at six per cent "on a review of the macroeconomic developments", and the CRR — the amount of liquid cash that banks maintain in their vaults — stays at 4.5 per cent "in view of current liquidity situation". The Repo Rates, the benchmark for short-term rates in the economy, were left untouched. The RBI Governor indicated that the policy moves could happen outside of the monetary policy review. "No need to wait for a date to cut rates."

The flow of credit had been less than anticipated. The non-food credit increased by 5.7 per cent up to October 17, 2003, compared to an increase of 7.4 per cent in the corresponding period of the previous year. However, recent developments indicated an improvement in the flow of credit. The removal of restriction, of the prime-lending rate (PLR) being the floor rate for loans to the retail and personal segment, "should provide further impetus to retail lending."

The monetary policy's thrust would continue to be on providing adequate liquidity to meet credit growth, and to support investment demand with a vigil on the price level and with a preference for a soft and flexible interest rate environment. Mr. Reddy said a significant growth in the flow of retail credit was observed, particularly in the housing sector. However, credit delivery to some sectors, particularly small-scale industries and agriculture, had to improve.

The persistence of large aggregate borrowing by the Central and the State Governments continued to cause concern. There was need for efforts to widen the revenue base, rationalise expenditures and, above all, increase the productivity of public investment in the commercial and social sectors.

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