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April 27, 2000
CREDIT POLICY 2000
The Rediff Business Commentary/R C Murthy
Policy drill not a 'non-event' any more
Integration with the world has enhanced the imponderables and risks for the Indian economy. Two months after the Union Budget presentation, the Reserve Bank of India Governor Bimal Jalan has taken a more conservative view of the emerging situation than Finance Minister Yashwant Sinha's.
Against seven per cent GDP growth Sinha projected for this year, Jalan is talking in terms of 6.5-7.0 per cent rise, assuming normal agricultural crop. There is a risk of growth this year being lower than that. But one should be optimistic, though caution has to be the watchword.
The finance minister's optimism stemmed from industrial production moving into top gear, satisfactory harvest last year and continuing high exports. Within the last two months, there have been signs of change in some areas at least.
First, inflation has raised its ugly head in the US, the Mecca for India's exporters. Interest rates there are north-bound as the policymakers look for a soft landing for the sky-borne US economy. Whether or not that goal would be achieved is a moot point.
But the echoes of the Wall Street's recent resounding plunge are being heard on the Dalal Street. Also, a slowdown in the US economy will have implications for India's exports.
Second, drought in five states has accentuated fiscal problems of those governments and the central government as well. Which should be of concern to Jalan. On top is the onerous responsibility on the RBI of managing the massive Rs l.7 trillion market borrowings programme this year.
Against this backdrop, one cannot expect an expansionary credit policy at least for the next six months. Jalan has projected a 15 per cent growth in money supply (M3) and 15.5 per cent rise in deposits with commercial banks this fiscal. How the RBI arrived at these projections has been left unsaid.
In fact, Jalan has scrupulously avoided many thorny issues. Like the reasons for divergence in economic growth projections. As everyone else, he is watching the battle royale between the Treasury and Opposition in Parliament.
The Credit Policy has spurred observers to raise questions on the government's committment to economic and labour reforms and public sector units' divestment. It has helped focus attention on whether the government will manage prudently on the supply side, which Jalan referred to in the Credit Policy statement.
The next four months will offer answers. If the rain gods are not generous in the coming season, pressures on the government will accentuate. True, a free trade regime, substantial food stocks, and a high level of foreign exchange reserves should provide scope for effective supply management.
But the actions have to be proactive. Only then can inflationary expectations be curbed. Otherwise, there is the danger of the price spiral rearing its head once again.
The RBI too has to be proactive. It may have to suspend -- reverse, if necessary -- the policy of cheap and easy money to tide over the slack season. Jalan has to do some tightrope walking in the coming slack season.
Monetary management is important. But monetary changes by themselves do not do the trick. The demand side package has to be in conjunction with supply side measures to achieve results.
The Credit Policy annoucement is thus not a non-event as was assumed. Especially, as it was preceded by the bank rate cut and CRR changes.
Jalan has set the agenda for banking reforms, the pace for institution building for the reforms to succeed and utilised the opportunity to announce a package for debt relief to farmers. Like the conversion of crop loans into medium-term loans.
At risk is the movement of Indian financial system on the road to global integration. Achieving parity with global interest rates is a sine qua non for Indian industry to be competitive internationally. In a couple of years, all the quantitative tariff barriers will disappear and the government will have to depend solely on customs duties, which also are to be brought down progressively
It is important that there should be a break or pause in interest rate reforms.
Jalan also announced norms for banks' entry into insurance and addressed the issues of repo rates, banks' capital adequacy, SLR and how to rein in their non-performing assets to enhance their international standing.
An issue yet to receive attention is the management of banks' exposure overseas. As Indian corporates, especially the dot-coms and others in information technology or software business, acquire assets abroad by the debt route, the involvement of local banks would steadily rise.
SLR = statutory liquidity ratio. Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. These are collectively known as SLR securities. The buying and selling of these securities was the seed of the 1992 scam. Back to the review.
CRR = cash reserve ratio, the fortnightly cash balances maintained by commercial banks with the central bank. Back to the review.
FCNR(B) deposits. (foreign currency non resident Indian - banking deposits.)
FCNR (foreign currency non resident Indian).
M1: A measure of money supply that includes all coins and notes in circulation, and personal current accounts. M3: A measure of money supply, including those covered by M2 -- a measure of money, supply, including M1, plus personal deposit accounts -- plus government deposits and deposits in currencies other than rupee. Back to the review.
Repo: repurchase agreements or ready forward deals, a secured short-term -- usually 15-day -- loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term it will buy back the securities at a slightly higher price, the difference in price representing the interest. Back to the review.
RBI Governor Bimal Jalan's policy statement
RBI's Credit and Monetary Policy 2000-2001
RBI's Credit and Monetary Policy 1999-2000
RBI's Credit and Monetary Policy 1998-1999
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