Reserve Bank of India (RBI) governor Bimal Jalan may not have too many surprises up his sleeve when he unveils his ninth credit policy tomorrow. In his career as governor, Jalan has seldom used the policy platform to announce major monetary measures. They, according to him, can be taken whenever the situation demands.
The October 2001 credit policy was an exception when Jalan declared cuts, both in the cash reserve ratio (CRR) and the bank rate. This time around, a large section of the banking community feels that he may refrain from announcing any big-bang monetary measures and stick to his philosophy of using the policy platform to review the macroeconomic development with a focus on structural issues.
With 24 hours to go before the credit policy announcement, Business Standard spoke to senior bankers, bond dealers and treasury managers on their expectations from the credit policy. Here is what they say:
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*CRR: Even though the feeling is uniform that there is no need to cut the CRR now because there is plenty of money, there is an anticipation that the RBI will announce a roadmap for cutting the CRR to 3 per cent, the lowest possible level. It may cut 50 basis points in five stages over nearly a year.
*Bank rate: No banker sees the need for a bank rate cut. There is a feeling that it will not be followed by a lending rate cut. Nevertheless, they will not be surprised if there is a cut of half percentage point "to lift sentiments". "The market has already discounted the bank rate cut. If there is no cut, the bond market will react by pushing the prices down so that there is an upward correction in the bond yields," a commercial bank chairman says.
*Savings rate: Deregulation is out of the question, but a cut of 50 basis points is not ruled out. Even though Yashwant Sinha has rolled back some of his budget measures, the government policy on small savings rate remains unchanged. A cut of 50 basis points in the savings rate, at 4 per cent now, is a possibility, particularly when the post office savings rate is 3.5 per cent. But nobody is certain about it.
*Call borrowing: The RBI is set to announce a cap on call borrowings of banks and restrict primary dealers' access to the overnight market. Banks' call money exposure can be fixed at 2 per cent of their deposits, or their net worth. Some banks have been taking positions in the gilts market based on their call market borrowings.
The best way to curb this is to cut the call market exposure. The RBI's plan is to develop the overnight market as a pure inter-bank market, while primary dealers and others can depend on repo facilities.
*Anti-money laundering measures: The government has not yet cleared the Money Laundering Bill. But the RBI is under pressure from central banks of other countries to put in place a system that will help Indian banks fight dirty money. It is likely to issue guidelines to choke the flow of unaccounted wealth.
*M&A financing: The banking laws are silent on funding takeovers, mergers and acquisitions. A few public sector banks have financed takeover deals, but even for acquisitions they have resorted to balance sheet financing. In other words, loans have been given keeping in view the acquirer's balance sheet and not the assets of the acquired company. The RBI may spell out norms for funding leveraged buyouts.
Other issues which the RBI may address include reconstitution of bank boards, definition of wilful defaulters, tightening of prudential norms in regard to non-performing assets and new capital norms for foreign banks' entry through the subsidiary route.
"The central bank will maintain its favourable stance on easy money through its bias towards soft interest rates and making available adequate liquidity even though it cannot address the issue of slack credit offtake," a banker points out. "It is expected to look critically at the great Indian bond rush and may come out with guidelines to prevent banks from going long in the government security market. An adverse trend in interest rates may knock the bottom out of their buckets, and one way of doing it will be putting a cap on banks' call money borrowing. The RBI may explore other avenues also."