Adesh Gupta
Group executive president & CFO
Indian Rayon
Being the mid term review of the credit policy, no major announcements were expected out of the policy. Going by the expectation, cuts in Bank Rate, CRR and Repo Rate seem to be good move by the RBI.
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However, whether these rate cuts were adequate considering the bad monsoon and poor consumer sentiments, the answer is clearly "No". Mr.Jalan has mentioned that the yield on GILT has come down from 10.82% to 5.92% for one-year paper and from 11.47% to 7.07% for 10-year paper between August 2000 to October 2002.
The fall is around 4.5% to 5%, the bank lending rates have fallen by 5.74% whereas the reduction in the bank rate is merely 1.75% from 8 % to 6.25%. During the same period, global bank rates have also fallen by around 4% to record low levels now. In the light, though not expected, higher rate cut could have given stimulus to the economy.
On CRR front, by cutting rate by 0.25%, RBI is moving towards its promise of bringing it down to 3% ultimately. The change in basis for determination of CRR to 80% is also a welcome step. This will reduce the volatility in the call market, which was not seen due to ample liquidity in the system currently.
The flexibility to banks in fixing the reset period for variable rate deposit will increase the visibility and importance of variable rate deposits. The flexibility of interest rate announced earlier was not able to attract the depositors and even banks were not able to establish this product.
Re-emphasis of disclosure by all the banks about the prime rate and spread on PLR will ensure the transparency.
Flexibility to the banks for fixing interest rate in respect of pre shipment export credit for 180- 270 and post shipment credit for 90-180 days period is welcome steps. The intention to relax it further for other export credit is also desirable. It could have been done now itself when banks are giving various loan products at rates lower than the export credit rates.
Allowing interest on EEFC balance issue is still pending to be addressed by Reserve Bank since very long time.
The change of structure of certificate of deposit by allowing floating rate basis CDs will be good for banks and institutions in accessing variable rate funds. Setting up of the group for rupee derivates is a very positive step.
It will go a long way in development of much deeper and wide debt market. Some of these initiatives and measures announced earlier had to see the implementation stage faster.
Overall, the RBI has shown lot of pragmatic signs. However, by cutting bank rate and repo rate little sharper, the regulator could have created better business climate.