Mid-term Review of Monetary and Credit Policy

Highlights of the Mid-term Review of Monetary and Credit Policy for the year 2003-04 announced by RBI Governor Dr. Y.V. Reddy on November 3, 2003.

Statement follows the pattern already set in the previous years "� both in outline and substance.

Domestic Developments

GDP growth in 2003-04 placed at 6.5-7.0 per cent, with an upward bias, compared to 6.0 per cent projected in April.

Inflation projected for policy purposes at 4.0-4.5 per cent, with a possible downward bias, as compared with earlier projection of 5.0-5.5 per cent.

Money Supply (M3) growth within the projected level as envisaged in April.

Lower increase in reserve money despite sharp increase in forex inflows.

Total resource flow to the commercial sector around the same level as last year.

Government borrowing of over 60 per cent of the budgeted amount completed with longer maturities and at lower cost to Government.

Fiscal deficit as at end-September higher compared to last year.

Reduction in interest rates in financial markets and deposits observed.

Noticeable reduction in banks' lending rates except for corporates and housing segment yet to take place.

External Developments

Orderly conditions witnessed in the forex market.

Rupee appreciated against US dollar but depreciated against Euro, Pound sterling and Japanese yen.

Foreign Exchange reserves up by US $ 17.2 billion since end-March to US $ 92.6 billion by end-October 2003, and are at comfortable level.

Exchange rate management, as in the past, based on flexibility, without a fixed or pre-announced target, but with ability to intervene.

RIBs of US $ 5.5 billion redeemed without any adverse impact on financial market and reserves.

In the first half, in US dollar terms, exports are up by 10 per cent and import growth is high at 21.4 per cent reflecting a pick up in economic activity, as evident from higher capital goods imports.

Overall Assessment

Improved macroeconomic environment with positive outlook on both the domestic and external fronts.

Gains from lower inflationary expectations in the recent years need to be consolidated and reinforced.

Improved investment climate to help in revival of investment demand.

Financial market sentiments stronger, but there is need for monitoring and providing for unforeseen contingencies.

Health of the financial sector continues to improve despite concerns with regard to a segment of financial institutions.

Signs of pick-up in non-food credit since August 2003.

Need to nurture conducive credit culture among financial intermediaries, corporates and households.

Credible actions required to address rigidity in lending rates and to improve quality of financial services.

Virtual elimination of binding forex constraints imparts strength to the economic management and accords comfort to the conduct of public policy.

Stance of Monetary Policy

Expectations of higher GDP growth, benign inflation outlook, subdued growth in money supply and stronger capital flows prompt continuation with the overall stance of monetary policy announced in April 2003.

The stance of monetary policy continues to be provision of adequate liquidity to meet credit growth and support investment demand with a vigil on the price level with preference for soft and flexible interest rate environment.

Continuance of measures with an accent on implementation with the objective of facilitating ease of transactions by the common persons.

Support economic growth consistent with stability by strengthening of institutional capacity through a consultative process in the medium-term.

Measures

Bank Rate kept unchanged at 6 per cent.

Cash reserve ratio kept unchanged at 4.5 per cent in view of current liquidity situation.

The Report of the Internal Group on liquidity adjustment facility (LAF) (which proposed a review of this facility) being placed on the RBI web-site for wider dissemination and comments.

IBA to advise banks on benchmark PLR.

Measures to improve credit delivery to agriculture and small scale sectors.

Advisory Committee/Working Group proposed to make a comprehensive review and suggest ways to improve credit flow to agriculture and small scale sectors and better deployment of RIDF and priority sector resources with SIDBI.

Simplification of procedures and complete flexibility in micro-finance structure proposed to boost credit flow.

Further move towards pure inter-bank call/notice money market.

Flexibility in sale of government securities contracted for purchase with adequate safeguards.

Banks to ensure hedging of foreign currency loans to corporates above US $ 10 million except for exporters and for forex expenditures.

Flexibility to exporters in realisation of export proceeds and write off of overdues, up to 10 per cent of their export proceeds in a calendar year.

Banks advised to quickly build up investment fluctuation reserve (IFR) so that they are better positioned to meet interest rate risks.

Road map for financial institutions to adopt 90 days norm for recognition of loan impairment. Standing Technical Advisory Committee on Financial Regulation for both banks and non-banks proposed.

Identification and special monitoring system for Systemically Important Financial Intermediaries (SIFIs) proposed in coordination with RBI, SEBI and IRDA.

Standing Committee to be set up on Procedures and Performance Audit on Public Services rendered by the Reserve Bank.

Banks advised to constitute Ad-hoc Committees to improve customer services including review of RBI regulations impinging on customer services.

Working Group proposed to address regulatory and supervisory issues pertaining to Development Finance Institutions (DFIs).

Extension of good corporate governance practices to PDs, NBFCs and FIs.

RTGS system scheduled for introduction in January 2004.

Economic and financial data base with RBI to be placed in public domain for convenience of researchers and other users.

Select private banks authorised to conduct government business for public convenience.

Payment of tax refunds through electronic clearing services (ECS) to be introduced.