NEW DELHI, December 25: The country's financial sector was `caught unawares' yet again in 1997 despite the best efforts by the Reserve Bank (RBI) and the North Block to ease the dual crises of a falling rupee and flush of funds at high rates.

Alarm bells were sounded as the rupee started a downward journey, owing to the ripple effect caused by other Far East Asian currencies, and despite strong and repeated interventions by RBI the currency lost nearly five rupees over last year's level.

This came at a time when the apex bank, through the credit policies of former governor C Rangarajan, was making the concerted efforts to revive the manufacturing sector by asking it to make use of the excess liquidity.

Rupee's journey downhill, despite RBI interventions and its arranging excess liquidity for the system, created an awkward situation where exporters rejoiced while importers grimaced.

Origin of the currency crisis here could be traced back to the major financial sector upheaval caused by the devaluation of the Thai baht against the dollar in July. Initially, this was termed as a country-specific phenomenon and all asian currencies kept their cool.

However, in October, almost coinciding with the tenth anniversary of the notorious Wall Street crash, world stock markets and currencies were thrown into a cesspool of uncertainty with the South Korean won, Malaysian ringgit and Indonesian rupiah falling against the dollar.

Experts say a devaluation of the rupee was overdue because of the general performance of world currencies. In fact, the rupee, which began 1997 at just over Rs 35 a dollar, hit an all-time low of Rs 39.90.

The Reserve Bank, which got a new governor in Bimal Jalan, had reportedly injected close to a billion dollar into the market through its several market intervention operations.

Though exporters were of the view that an exchange rate in the range of Rs 40 to Rs 42 was `realistic', importers were shocked at the cost escalation of their imports. Subsequently, RBI was forced to partly roll back its earlier measures to bring in high liquidity to the system and the new governor even asked the foreign financial institutions to `behave reponsibly'.

The government on its part reasoned that the fall of the currency was chiefly due to the ripple effect caused by other Far Eastern currencies. Also there was a considerable forex outflow through foreign institutional investors.

Collapse of a multi-party government and less-than expected growth of the economy coupled with the year-end closing at their home offices had prompted FIIs to retrieve their investments in the emerging markets like India temporarily.

Things had, however, begun on a positive note as expectations of a turnaround in the general health of the sector heightened with P Chidambram's ''path-breaking'' budget which analysts described as the recipe for growth.

Tax rates were slashed or rationalised, healthy public sector enterprises were promised and given autonomy, tax evaders were given a last chance to discipline themselves through the voluntary disclosure of income (VDIS) scheme and states were offered bigger share of tax revenue as recommended by the Tenth Finance Commission.

Therefore, Rangarajan had his objectives clear cut as the slack-season credit policy was prepared in April to introduce measures to boost growth. The policy announced a reduction in lending rates and injection of liquidity through cuts in cash reserve ratio and reducing net demand and time liabilities to 10 per cent.

The busy-season credit policy announced in October further underlined this thought by reducing CRR by another two per cent in a phased manner to eight per cent, with each percentge point cut infusing about Rs 4,800 crore into the system.

Similarly, the prime lending rate also was broadly freed from restrictions, but for one segment which has to stay at 13.5 per cent.

Yet, the real show for captial mobilisation was staged outside India as Videsh Sanchar Nigam successfully completed its global depository receipts (GDR) issue of $800 million after in earlier attempt in May 1994.

Another telephone utility company Mahanagar Telephone Nigam did admirably considering that its GDR issue at the fag end of the year was launched amid global market gyrations. The Gas Authourity of India (Gail), however, chose not not risk its change by holding the issue back.

The year saw commercial banks showing keenness to expand their business activity. Public sector banks, barring very few reported steady reduction on their non-performing assets though most banks maintained the stipulated eight per cent capital adequacy ratio as prescribed by the Basle committee.

Four public sector banks -- Bank of Baroda, Bank of India, Corporation Bank and State Bank of Travancore -- entered the primary market for increasing their capital and their initial public offerings were hugely successful.Two private banks, ICICI Bank and IndusInd Bank, also sought to mobilise capital through the equity route.

Though much of these reforms pertained to the manufacturing sector, 1997 saw efforts of the National Bank for Agriculture and Rural Development (Nabard) further strengthened by an allocation of Rs 5,700 crore as the general of credit - up from Rs 5,250 crore in 1996-97.

Another reform aimed at boosting the exports was enhanced export credit by reducing rates. Export credit up to 180 day stood at 12 per cent from 13 per cent and credit beyond 180 day stood at 14 per cent - down from 15 per cent - thus meeting a longtime demand of exporters.

Similarly, rationalisation was effected in the post-shipment export credit also by allowing banks to fix the rates with a higher ceiling of 13 per cent. However, a dark spot in the financial sector was the fiasco related to CRB Capital Markets in which promoter Chain Roop Bhansali walked away with investors' funds yet again demonstrating the loopholes existing in banking and securities regulations.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.