Mumbai, Oct 29: The Reserve Bank of India’s move to do away with the incremental Cash Reserve Ratio (CRR) of 10 per cent on Foreign Currency Non-Resident (Banks) (FCNR-B) deposits will see the infusion of Rs 1,061 crore in the banking system.

“It is a typical switch-on, switch-off policy that the central bank has acquired. Two years back they had decided that CRR needs to imposed so they did it, now they do not want it to continue”, says ICICI Bank executive vice-president PH Ravikumar.

Banks are required to maintain a CRR of 10 per cent on incremental liabilities under the FCNR(B) scheme over the level prevailing as on April 11, 1997. The move—a major discouragement to banks to raise FCNR(B) deposits—was intended to decrease India’s external debt.

In the mid-term review of the monetary and credit for 1999-2000 on Friday, RBI governor Bimal Jalan, in a bid to minimise the country’s short-term external borrowing liabilities, has also decided to increase the minimum maturity of FCNR(B) deposits from six months to one year. “This will have a good impact as we will be able to raise more deposits. Besides, these deposits will be more stable”, Ravikumar said. The banks will, however, continue to have the freedom to offer floating rate deposits (with a maturity of one year or more and interest reset period of six months), the RBI said.

Analysts said that the RBI’s move to increase the maturity profile of FCNR(B) deposits was due to its worries on the balance of payments front and partly to widen the maturity profile of the country’s external debt.

Governor Jalan on Friday said that he was worried about the balance of payments situation and that the management of BoP will continue to depend on the performance of exports. “Partly because of the slowdown in the world economy and also the East Asian economic crisis, exports in 1998-1999 declined by 3.9 per cent in US dollar terms. There is some evidence of a pickup in exports during the first five months of the current financial year when exports grew by 4.6 per cent in US dollar terms. It is necessary that the momentum is kept up”, Jalan said.

He, however, appeared confident that the current account deficit will continue to below two per cent of GDP. “On the whole, the current expectation is that despite the effect of increases in oil prices, the current account deficit in 1999-2000 will still be below two per cent of GDP in view of the encouraging developments in respect of invisibles, particularly private remittances and software exports”, Jalan said. It may be recalled that crude oil prices have increased from $16.71 per barrel at the beginning of April 1999 to $22.95 per barrel at the end of September 1999.