MUMBAI, April 21: Bankers are expecting an expansionary monetary policy to give a big push to non-food credit and keep the interest rates low despite the massive government borrowing programme in fiscal 1999.The money supply target is likely to be kept at a higher band of 16-16.5 per cent, up from 15-15.5 per cent in 1997-98, bankers across the country feel. They, however, rule out the possibility of any immediate cut in banks' cash reserve ratio (CRR) as the system is flush will liquidity at the moment.
In the monetary policy for the first half of 1997-98, former RBI governor C Rangarajan had revived the dormant bank rate and announced phased cuts in CRR to 8 per cent by March 1997. However, the current thinking in the Reserve Bank is not to push for CRR cuts and integration of money and forex -- as charted out by the former RBI governor. RBI insiders say that the integration of the forex and money markets is less of a priority with governor Bimal Jalan than it was under Rangarajan. The central bankapparently feels that ensuring stability on the forex front might mean having to build walls between the forex and money markets -- something which the Rangarajan era tried to raze down. Jalan has indicated that his primary concern is growth and stability on the external front. Inflation control and availability of bank credit at a reasonable real interest rate will also continue to be two pillars of the monetary policy.
However, Jalan is unlikely to give too much of importance to the broad money (M3) growth target. "As long as inflation is under control, credit is available to the corporate sector and the rupee is stable, the RBI may not bother about the exact quantum of inflation and M3 growth in percentage terms," bankers said.
The list of bankers' expectations include:
Restoration of 100 per cent refinance limit on export credit to bring back the cushion of refinancing, thereby encouraging banks to lend to exporters; Allowing banks to fund takeovers; Permitting banks to gofor badla financing; Allowing foreign institutional investors' (FIIs) forward cover on exposure in equity market; Permitting FIIs' entry into the treasury bills market; Introduction of different maturity treasury bills at the shorter end of the market; Allowing banks to raise long-term resources without SLR and CRR stipulations for funding infrastructure projects; Keeping infrastructure funding out of net bank credit while computing priority sector lending; n Fine-tuning CRR on FCNR(B) deposits to enable banks to avoid exchange rate risks; Allowing banks to offer the facility of premature withdrawal of deposits only to retail depositors as large-scale withdrawal of corporate deposits leads to asset-liability mismatches.Bankers also expect the RBI to waive the CRR requirement on inter-bank transactions to prop up the term money market. However, that is unlikely to be announced in the monetary policy as waiver of the CRR on interbank transaction will call foramendment to the RBI Act. Going by the Act, a minimum of three per cent CRR is required to be kept on banks' net demand and time liabilities.
State Bank of India chairman MS Verma expects the RBI to allow banks keeping infrastructure funding out of net bank credit for the purpose of computing priority sector lending target. In other words, for every Rs 100 disbursed to the infrastructure sector, banks need to disburse Rs 40 to the priority sector. "I personally don't expect any CRR cut at this moment as there is enough liquidity in the system," Verma said.
Bank of Baroda chairman K Kannan said, "The RBI will send out a clear message to banks that credit will have to be available to all industries and should take steps for the effective distribution of credit. The policy will also be aimed at bringing down the cost of credit. The RBI should now allow banks to take decisions on hiking their lending or deposit rates without going to their respective boards to hasten the decision-making process."
Bank ofIndia CMD MG Bhide feels the focus of the policy will be banks' asset liability management. According to BoB's Kannan, the RBI is expected to encourage lending to the infrastructure sector by extending tax reliefs. "I do not expect any announcement on the issue of takeover funding right away. Any decision on takeover funding should ideally be left to banks to work out within the existing takeover norms of SEBI since it is nothing but an investment being made by banks," Kannan said.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
