The cut in CRR - the RBI's tool to regulate liquidity in the banking system - will release Rs 3,250 crore into the system. However, bankers don't expect any reduction in prime lending rates as a sequel to this reduction. Exporters and corporate captains who were demanding lower interest rates were disappointed as the RBI failed to announce any reduction in bank rate, repo rate and export credit. The outgoing Finance Minister and Commerce Minister had also calledfor reduction in interest rates. The RBI had brought down interest rates soon after the presentation of the budget in March.

Initiating several reforms to develop the money market, the RBI Governor Bimal Jalan announced a series of steps including introduction of an interim liquidity adjustment facility for banks, abolition of all sectoral refinances except export credit refinance, widening of money, repos, government securities and debt markets, rationalisation of lending rates for banks, tightened prudential norms by raising the current category of banks' investments to 75 per cent and capped investment in subordinated debt of other banks at 10 per cent of the capital.

Arguing against a cut in interest rates, the RBI governor said that the present level of low inflation and high rate of growth in money supply actually warrant tightening of liquidity and increase in interest rates to dampen demands and avoid "potential problems".

The central bank has allowed the boards of banks to delegate powers toasset liability management (ALM) committees for fixing interest rates on deposits and advances in order to enable bank managements to respond promptly to changes in interest rate environment. ``The stance of monetary policy would continue to facilitate adequate availability of liquidity along with stable medium and long-term interest rates, with policy preference for softening to the extent the circumstances permit,'' Jalan said.

In keeping with the wishes of industry, especially those investors requiring project finance, the RBI has permitted banks to offer fixed rate loans. Carrying forward implementation of Narasimham committee recommendations in respect of reducing risk exposure of banks, the RBI has enhanced by a cautious five per cent to 75 per cent the minimum requirement of `marking to market' investment portfolio with effect from the year ending March 31, 2000.

Regarding credit for infrastructure, Jalan said banks and institutions are free to sanction term loans for technically feasible,financially viable and bankable projects and undertaken by both public and private sector undertakings. Pending implementation of Narasimham Committee's suggestion that the RBI support to the market should be through a liquidity adjustment facility (LAF), the central bank has decided to introduce an interim LAF (ILAF) through repos and lending against collateral of government of India securities.

As per the ILAF, the general refinance facility has been withdrawn with immediate effect and replaced by collateralised lending facility (CLF) upto 0.25 per cent of the fortnightly average outstanding aggregate deposits in 1997-98 which will be available for two weeks at the bank rate.

In a bid to develop the money market, the RBI has decided to develop the Repos market with appropriate regulatory safeguards such as delivery versus payment (DVP), uniform accounting, valuation and disclosure norms and restricting repos to instruments held in dematerialised form with a depository. It has also decided to allow theUTI, LIC, IDBI and other non-bank participants in money market to access short-term liquidity through repos thereby facilitating their cash management and gradual move out of the call money market. To facilitate hedging of interest rate risks and ensuring orderly development of derivatives market, the RBI said guidelines would be issued for interest rate swaps and forward rate agreements.

Responding to banks' representations, the RBI has decided to reduce the `waiting period' from two years to one year during which a renegotiated or rescheduled asset has to be classified as sub-standard if the interest and instalment have been serviced regularly as per the terms of rescheduling of loans.

Predicting a lower GDP growth for the fiscal ended March 1999, Jalan has projected an 18 per cent growth in non-food bank credit including investments in commercial paper, shares/debentures/bonds and public sector undertakings and private corporate sector. ``The availability of this order of credit should duly meet thedemand of the productive sectors of the economy,'' Jalan said, adding that banks should plan their credit operations on the assumption that sufficient liquidity would be available in the current year to finance additional production as per normal banking norms.