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October 29, 1999
'There was no need to cut CRR, RBI should have targeted interest rates'
Syed Firdaus Ashraf in Bombay
Economists, industry captains and commentators said the busy season Credit Policy is good, but not good enough.
Industrialist Rahul Bajaj, president of the Confederation of Indian Industry, was disappointed because he "expected that the Credit Policy would reduce interest rates by 0.5 per cent". Bajaj said: “This, along with the CRR cut, would have given a further fillip to industrial growth. I hope such a cut would be effected in the interim, preferably before the budget. This would raise market expectations, and force another much-needed cut in the small savings rate.”
M R Mayya, former president, the Bombay Stock Exchange, said, "There was no need to cut the CRR when there was so much liquidity in the market. The credit is picking up and I don't think there was a need to bring down the CRR. But the governor should have brought down the rate of interest rather than cutting the CRR. I don't know how far this move will help."
Surjit S Bhalla, economist, Oxus Research & Investments, said: “I was not expecting the bank rates to be cut, because I believe that the persisting low inflation rate is an opportunity for the RBI to cut deposit rates on provident fund and postal deposits. Besides, there were even statements that high deposit rates were constraining the monetary policy.
"Interest rates in the country are very high at the moment and they cannot be brought down by cutting bank rates. There is considerable scope to bring down the interest rates by bringing down the deposit rates, which the government will have to do.”
Deepak Mukherjee, managing director, the Industrial Development Bank of India, said the Credit Policy "exceeded expectations".
"It is pro-reform and has come at a time when the rate of inflation is low and the rupee is behaving well. The one percentage point cut in the Cash Reserve Ratio may give scope for a reduction in the interest rate. The best part of the Credit Policy is that it has recognised the banker's difficulty of the overhang of the non-performing assets.
"However, there is no mention about debt recovery. Maybe it's at the back of the RBI governor's mind?"
K P Singh, president, Associated Chambers of Business and Industry, and Ashok Khanna, president, Punjab, Haryana and Delhi Chamber of Commerce and Industry, welcomed the release of liquidity of over Rs 80 billion through reduction in CRR and removal of incremental CRR on FCNR(B). However, Khanna said the measures were not enough to kickstart the economy that was on the recovery path. He said issues of collateral and guarantees for lending on cash flow basis should have been addressed in the current Credit Policy.
Khanna said the central bank should have been pro-active in making the banks reduce spreads through increased productivity.
Sudhir Jalan, president, the Federation of Indian Chamber of Commerce and Industry, said: "Industry is looking forward to a sizeable reduction in the interest rates. It is necessary that the finance ministry and the RBI and banks come together and take concrete steps for an across-the-board reduction in interest rates which should include contractual savings like PF and National Savings Scheme. The average cost of funds to the banks at eight per cent is very high."
Jalan pointed out that the commercial banks' investment in government securities has increased by Rs 366.48 billion in the current fiscal as against an increase of Rs 275.33 billion in the corresponding period last year.
This would mean that banks are currently holding government securities in excess of statutory liquidity ratio prescription by a considerable margin. “This anamoly can be rectified only by a reduction in the rate of return on the government securities which would enhance the lendable resources to the commercial sector,” he said.
RBI Governor Bimal Jalan's policy statement
RBI's Credit and Monetary Policy 1999-2000
RBI's Credit and Monetary Policy 1998-1999
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