At the same time, in order to boost sagging exports, RBI Governor Bimal Jalan has cut the pre-shipment export credit up to 180 days by one percentage point to 11 per cent and restored the export refinance limit of 100 per cent on the outstanding export credit over the February 16, 1996 level offering banks a cushion for their export lendings.

The one percentage point cut in bank rate (the rate at which the RBI lends funds to banks) and repo (repurchase agreement on government securities) is expected to trigger a decline inlending and deposit rates of commercial banks. Oriental Bank of Commerce already announced a one percentage point reduction in prime lending rate.

The stock markets and a section of the corporate sector were not pleased with the maiden credit policy of Jalan. Sensex fell by 113 points as the policy proposals failed short of market expectations. ``There is nothing in the policy to encourage infrastructure financing, which is a critical input for boosting investments and reviving the economy,'' said R K Pitamber, president, Bombay Chamber of Commerce and Industry.

Jalan said the slowdown in industrial growth is a matter of concern for the growth of incomes in the economy as well as for the development of the financial sector. ``The slowdown in the industrial growth witnessed in the first half of 1997-98 has turned out to be more persistent and widespread than expected,'' Jalan said.

The governor has, however, left the CRR untouched as, according to him, the broad money supply (M3) at 17 per cent isproviding ``comfortable liquidity conditions.'' CRR cuts could be announced during the course of the year in the light of the evolving circumstances, he said.

``The ultimate objective is bring down the CRR to three per cent in the long run to raise banks' profitability,'' Jalan said at the press conference.

Deviating from the convention of announcing a string of measures in the credit policy, he used the occasion to focus on structural issues and the monetary stance of the RBI. He has kept the target of money supply (M3) unchanged at 15-15.5 per cent and inflation rate at 5-6 per cent while deposit growth target is pegged at 15.5 per cent and credit growth 19 per cent.

The RBI governor also announced a reduction in the minimum period of maturity of term deposits from from 30 to 15 days, removed restrictions imposed on banks from offering same rate on deposits of same maturity irrespective of size of deposits and changes in FCNR (foreign currency non-resident) deposit rates. In order to remove thedisincentive to the flow of credit to small borrowings below Rs 2 lakh, instead of prescribing a specific rate uniformly for all banks, interest rates on loans below Rs 2 lakh should not exceed the Prime Lending Rate (PLR) which is available to the best borrowers of the bank.

Giving greater freedom to banks in respect of several aspects of their deposit/lending operations, the RBI has allowed banks to determine their own penal interest rates for premature withdrawal of domestic term deposits. It also hiked the interest rates on FCNR(B) loans above one year by 50 basis points and lowerd rates by 25 basis points on short term FCNR(B) loans up to one year to take the load off from the country's short term debt portfolio.

Stating that henceforth in view of several important changes that have taken place in the regulatory framework, greater importance would be accorded to structural changes in the credit and monetary policy statements. The credit policy did not provide any concrete measures to support theailing agriculture sector. Jalan said the RBI is studying the Gupta panel report on credit to farm sector and would take steps accordingly.

The RBI governor proposed to strengthen the existing capital adequacy, income recognition and provisioning norms of commerial banks following the recommendations of the M Narasimham committee. He also promised to look into the aspect of universal banking. The RBI will prepare a ``discussion paper'' on the harmonising the role of bank and financial institutions, Jalan said.

Dr Jalan's Prescription