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Mid-Term Review of
Monetary and Credit Policy for the year 2000-2001: SPECIAL FEATURE
From the banknetindia team
This Credit Policy is mainly a review of the operational areas and does not mention any major policy changes, though some of the pronouncements have great implications. This Credit policy mainly focuses on structured issues in the banking sector. The RBI replaced the bullishness of the April policy by caution in the latest credit policy.
While emphasising the strengths in the economy, statement rightly mentions that the interest rate outlook would "crucially" depend on external market conditions, the rate of inflation and the demand for credit from corporates, coupled with the government borrowing programme. The RBI will try to keep the rates "stable", and not "low" as mentioned in the earlier policies.
Highlights:
·GDP growth estimate revised to 6.0-6.5% from 6.5-7%
.Outlook for agricultural supplies comfortable
.RBI reiterates 00-01 inflation will be around 4.5%, as power contributing to inflation, excluding fuel prices is only 2.44%
.Projected growth in M3 likely to remain around 15%
.Centre's fiscal deficit at Rs 36,447 cr; down 24.3% from last year
.Forex markets and reserves now 'relatively stable'
.Flow of resources from scheduled commercial banks to commercial sector up Rs 26,471 crore (5.6%)
.Exports in the first 4 months of the fiscal up 25% at $13.9 b; imports also up 25% at $17.6 billion.
THE MEASURES:
·RBI Leaves Current Interest Rates Structure Unchanged, no change in Bank Rate, CRR
·RBI has restored EEFC account balances to 50% and 70% respectively, but bank must not provide loans against EEFC balances. EEFC balances must be held as current accounts only.
.Norms for bank financing of investments in shares eased
.Non-banks permitted to lend in the call money market
.Guidelines for issue of commercial paper modified
.Rating to be made mandatory for term deposits accepted by all-India FIs from November 1, 2000
.General provision on standard assets to be included in Tier 2 Capital
.Public sector banks told to annex balance sheets of subsidiaries to their balance sheet
.Grace period of 30 days for delinquent loans withdrawn
.The 2% penal interest on defaulting borrowers deregulated
.Screen-based trading of gilts on stock markets
.period for certificates of deposit withdrawn
.Banks allowed to invest 5% of previous financial year loans in shares and debentures.
.Classifications of investments by banks have been modified to now include 3 categories - To be held to maturity, Available for sale and Held for trading. Banks can shift bond investments to/from hold to maturity once a year. These securities also need not be marked to market. The securities held under available for sale must be marked to market at the year-end or at more frequent intervals. The securities held for trading need to be revalued monthly or at more regular intervals.
Analysis:
The announcement on CRR and Bank rate was in line with market expectations. RBI had hiked CRR and Bank rate in August'2000 to counter the volatility in foreign exchange market the time when INR came under severe pressure due to external factors like crude prices. With exchange rate still volatile there was very little scope for rolling back the earlier measures and any hike would have hit the sentiments also impacted the pick up in industrial activity. Government borrowing programme of-course continues to be another area of concern.
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