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policy environment> domestic environment
Monetary and Exchange Rate Policy Measures
The course of monetary management in 1999-2000 could be categorised into three phases, viz., Phase I (April-May 1999), Phase II (June-October 1999) and Phase III (November 1999-March 2000).
Phase I
The Reserve Bank was able to ease monetary conditions following the turnaround of capital flows in March 1999. The Reserve Bank reduced the Bank Rate by one percentage point to 8.0 per cent at the close of business on March 1, 1999 and the fixed repo rate by two percentage points to 6.0 per cent, effective March 2, 1999. The Reserve Bank reduced the cash reserve ratio (CRR) by 0.5 percentage point, effective the fortnight beginning March 13, 1999 releasing, in the process, Rs.3,100 crore in terms of lendable resources to the banking system. In response, major public sector banks reduced their deposit rates and prime lending rates. The Reserve Bank continued to ease monetary conditions by reducing the CRR by a further 0.5 percentage point, effective the fortnight beginning May 8, 1999.
Phase II
The situation changed during the second phase as capital flows dried up in end-May 1999. The resultant volatility in the foreign exchange market, was, however, quickly contained as a result of the Reserve Bank's operations in the foreign exchange market and the money market coupled with the reiteration of its intention to meet demand and supply mismatches. There was a second bout of volatility in the foreign exchange market in end-August 1999. The Reserve Bank was again able to restore orderly conditions in the foreign exchange market with a similar mix of foreign exchange and money market operations and announcement effects. The Reserve Bank continued to align short-term interest rates with the interest rates implied in in the forward market premia in order to pre-empt funds from flowing into the foreign exchange market, in view of the prevailing excess demand conditions. This was achieved by modulating discretionary liquidity through export credit refinance to commercial banks and liquidity support to primary dealers (PDs), which resulted in the firming up of call rates. The Reserve Bank also continued with its policy of accepting private placements/devolvements of government paper when the domestic conditions were tight and offloading them in the market when the situation eased. Thus the Reserve Bank was able to modulate monetary and interest rate conditions using an array of mostly indirect monetary policy instruments such as open market operations and money market support to banks and primary dealers.
Phase III
The third phase saw the return of excess supply conditions in the foreign exchange market with the turnaround in capital flows. This, in turn, allowed the Bank to ease monetary conditions further. The cash reserve ratio was reduced by one percentage point in two stages of 50 basis points each, effective the fortnights beginning November 6 and November 20, 1999, respectively. This augmented commercial banks' lendable resources by about Rs.7,000 crore. Effective the fortnight beginning November 6, 1999, the liabilities under the FCNR(B) scheme were exempted from incremental CRR requirements of 10.0 per cent (over the April 11, 1997 level). The supply of discretionary liquidity through the reduction in reserve requirements allowed banks to retire their borrowings from the Reserve Bank. Call rates thus eased below the Bank Rate. Further, as a result of the return of stability in the foreign exchange market, the Bank withdrew the stipulation of a minimum interest rate of 20.0 per cent per annum on overdue export bills and the interest rate surcharge of 30.0 per cent on import finance imposed in January 1998.
The Reserve Bank introduced a "Special Liquidity Support" facility for the period December 1, 1999 to January 31, 2000 with a view to enabling banks to meet any unanticipated additional demand for liquidity in the context of the century date change. Banks were allowed to avail of liquidity to the extent of their excess holdings of Central Government dated securities/ Treasury Bills over the required statutory liquidity ratio (SLR) at the rate of 2.5 percentage points over and above the Bank Rate. Further, with a view to enabling the banks to meet any unanticipated surge in currency demand on account of the century date change, cash in hand, amounting to about Rs.4,500 crore, with banks was allowed to be included for compliance of CRR requirements during the same period.
Read Developments during 2000-01
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