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April 21, 1999


Credit Policy evokes mixed reactions: CRR cut hailed, unchanged interest rates flayed

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Bankers and industry associations offered mixed reactions to various measures announced by the Reserve Bank of India in its Credit and Monetary Policy announced on April 20.

Commenting on the decision to allow cheque writing facility to the money market mutual funds, Prudential ICICI managing director Ajay Srinivasan said that the step will lead to some of the incremental flows into the banking system getting diverted to such funds. He added that Prudential ICICI was the first mutual fund to introduce a cheque writing facility with its liquid plan.

''The package proposed to boost retailing of government securities is interesting and looked at in conjuction with the recent provident fund reform, one should see more gilt mutual funds in the future,'' he said.

President of the All India Exporters' Chamber Rajesh B Shroff welcomed the introduction of issuance of cheques from EEFC account directly for the exporters.

"However, there was disappointment that export credit rates have not been changed. The exporting community would have welcomed the export credit rate at 9 per cent for pre-shipment," he said.

President of the Federation of Indian Export Organisations Navratan Samdria said that the committee of bankers set up to ensure the removal of procedural hurdles in the way of small exporters must have representation of the FIEO.

Punit Srivastava, analyst at Credence, stated that as expected, the RBI has gone for only a token rate cut. The market players do not seem to be enthused by this rate cut, especially on back of uncertain political scenario.

As the central bank has been quite active in its open market operations, excess liquidity of Rs 32.50 billion to be generated on account of this cut would easily be sucked out. However, in the longer term, it will definitely help banks to augment theri lendable resources.

About the withdrawal of refinance facility, Srivastava said, though the withdrawal of general refinance facility is a landmark step, banks are not likely to be affected much from this measure.

Against the total outstanding limit of Rs 11.15 billion for scheduled commercial banks during the fiscal, banks have hardly used this facility. In fact, export refinance facility has been used more often than GRF with outstanding amount used till February 1999 going up to Rs 47.15 billion against the total limit of Rs 68.02 billion for the same month, he said.

According to him, the re-introduction of 182-day treasury bill will help in reducing the redemption payments at the shorter end. Redemption of 364-day treasury bill in the fiscal year 1999-2000 would alone account for around Rs 100 billion.

This increases the gross borrowing of the Central government by re-introducing 182-day treasury bill, the RBI would be able to reduce the redemption pressure of short term securities to a certain extent in the next fiscal.

Welcoming the credit policy, Rajesh V Shah, president, the Confederation of Indian Industry, said that the slack season policy announced by Dr Jalan had 11 clear positive plus points. These included carrying forward of financial sector reforms, easing of credit availability and liquidity, autonomy for banks, easing of export financing moving towards international accounting standards, stronger government securities market, strengthening infrastrucutre financing, supporting venture capital funds, deepening the money market, reducing non performing assets and measures for non banking financing companies.

According to Shah, all these measures taken together would deepen financial sector reforms as well as credit availability and a higher growth rate in industry.

The announcement to cut the CRR by 0.5 per cent, the cii president said, would ease liquidity in the system and the release of Rs 32.50 billion would provide the much-needed funds for industrial activity. Coming at a time when the industrial slowdown is receding and industrial recovery is on the horizon, the slack season credit policy would fuel and reinvigorate growth in the economy, Shah said.

The Indian Merchants' Chamber president Y P Trivedi said the RBI has also conceded industry's request for tenor-linked prime lending rate for different maturity periods. It has now decided to grant the banks freedom to operate different PLRs for different maturities, provided the norms of transparency and uniformity of treatment are ensures. The efficient banks will now be able to attract deposits at lower rates, so that banks will get cheaper source of finance for lending.

The Punjab, Haryana and Delhi Chamber of Commerce and Industry ) said it would have been better if CRR was reduced by 1.5 to two per cent and bank rate by one per cent to help further softening of interest rate.

The Federation of Indian Export Organisations expressed disappointment at other provisions, stating that they are not at all in tune with the Exim Policy announced last month.

The All India Association of Industries said the emphasis of the RBI on adequate credit to the small scale and export sectors is commendable but the measures should be implemented.

The various chambers of commerce in Calcutta appeared divided over the slack season credit policy announced by the RBI today.

The Indian Chamber of Commerce president K K Bangur in a statement said the policy announced by the RBI for the first half of the current fiscal did not adequately meet the expectations of business, as the primary need of reducing interest rates significantly was ignored completely.

He pointed that it was critical to boost investments in the economy at the current juncture, and it was imperative that the cost of credit was brought down to enable a quantum leap in investments. This is clearly an important opportunity lost to revive industrial growth, the ICC chief added.

The Bengal National Chamber of Commerce and Industry president Bhaskar Sen said against the background of general recessionary trend prevailing in the country, lending rates should have been lowered.

Exporters had also expected lower export credit rate in view of low export growth, but nothing was done in this field, he added.

The Calcutta Stock Exchange president Kamal Parekh said the slack season credit policy was below expectation as nothing was done to reduce lending rates.

"We had expected at least one per cent reduction in lending rates in the policy," he said.

April 20, 1999: The RBI's Credit and Monetary Policy

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