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policy environment> domestic environment
Monetary and Exchange Rate Policy Measures during 2000-01
The Reserve Bank continued to ease monetary conditions in April 2000 through a package of measures. The CRR was reduced by one percentage point to 8.0 per cent in two equal stages, effective April 8 and April 22, 2000, augmenting the lendable resources with commercial banks by about Rs.7,200 crore. The Reserve Bank reduced the Bank Rate by one percentage point to 7.0 per cent, effective the close of business on April 1, 2000. The fixed rate repo rate was reduced by one percentage point to 5.0 per cent, effective April 3, 2000. The Reserve Bank cut the savings deposit rate of scheduled commercial banks by 0.5 percentage point to 4.0 per cent, effective April 3, 2000. Comfortable liquidity conditions allowed commercial banks and primary dealers to redeem their borrowings (Rs.11,172 crore) from the Reserve Bank by April 21, 2000, thereby easing call rates below the Bank Rate. There was a general softening of interest rates across the maturity spectrum.
May 2000 saw a return of excess demand conditions in the foreign exchange market, mainly on account of large oil import payments and a slowdown in capital inflows. The Reserve Bank undertook net sales of US $ 1,948 million during May-June 2000 to meet temporary demand-supply mismatches. The resultant gap put pressure on money market conditions, driving up banks' and PDs' recourse to the Reserve Bank by Rs.7,236 crore by June 30, and thereby nudging up call rates above the Bank Rate especially during the second half of May and June 2000. The Reserve Bank accepted private placements/ devolvements amounting to Rs.6,961 crore. The Centre's ways and means advances (WMA) declined by Rs.6,859 crore.
In order to reduce the uncertainty in the foreign exchange market, the Reserve Bank undertook the following policy actions on May 25, 2000: (i) an interest rate surcharge of 50 per cent of the lending rate on import finance was imposed with effect from May 26, 2000, as a temporary measure, on all non-essential imports; (ii) it was indicated that the Reserve Bank would meet, partially or fully, the Government debt service payments directly as considered necessary; (iii) arrangements would be made to meet, partially or fully, the foreign exchange requirements for import of crude oil by the Indian Oil Corporation; (iv) the Reserve Bank would continue to sell US dollars through the State Bank of India in order to augment supply in the market or intervene directly as considered necessary to meet any temporary demand-supply imbalances; (v) banks would charge interest at 25 per cent per annum (minimum) from the date the bill falls due for payment in respect of overdue export bills in order to discourage any delay in realisation of export proceeds; (vi) ADs acting on behalf of FIIs could approach the Reserve Bank to procure foreign exchange at the prevailing market rate and the Reserve Bank would, depending on market conditions, either sell the foreign exchange directly or advise the concerned bank to buy it in the market; and (vii) banks were advised to enter into transactions in the foreign exchange market only on the basis of genuine requirements and not for the purpose of building up speculative positions. In response to these measures, the rupee regained stability and traded within a narrow range of Rs.44.57-Rs.44.79 per US dollar during June 2000.
The introduction of the Liquidity Adjustment Facility (LAF) effective June 5, 2000, allowed the Reserve Bank an additional lever for influencing short-term liquidity conditions. With the persistence of pressures in the foreign exchange market, the Reserve Bank conducted reverse repo auctions, averaging about Rs.3,000 crore, at interest rates which increased from 9.05 per cent as on June 9 to 10.85 per cent as on June 14. The Reserve Bank rejected all bids in the June 16, 2000 auction. Reacting to this, inter-bank call rates went up to 28.0 per cent. The Reserve Bank accepted reverse repos (Rs.1,350 crore) at 13.5 per cent as on June 19, 2000 and gradually scaled down the reverse repo rate to 12.25 per cent as on June 28, 2000 with the return of stability in the foreign exchange market.
The exchange rate of the rupee, which was bound in the range of Rs. 44.68-Rs. 44.74 per US dollar during the first half of July 2000, depreciated to Rs. 45.02 per US dollar on July 21, 2000. On a review of developments in the international and domestic financial markets, including the foreign exchange market, the Reserve Bank took the following measures on July 21, 2000: (i) the Bank Rate was increased by 1 percentage point from 7 per cent to 8 per cent as at the close of business on July 21, 2000; (ii) CRR was increased by 0.5 percentage point from 8 per cent to 8.5 per cent in two stages by 0.25 percentage point each, effective July 29, 2000 and August 12, 2000, respectively; and (iii) the limits available to banks for refinance facilities including the collateralised lending facility (CLF) were reduced temporarily to the extent of 50 per cent of the eligible limits under two equal stages effective from July 29, 2000 and August 12, 2000. In early August, the Reserve Bank also introduced special repo auctions of more than one day maturity to absorb excess liquidity.
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