RBI policy seen providing thrust to economy with rate cuts

Sunday, 02 November 2003, 20:30 IST
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NEW DELHI: The Reserve Bank of India (RBI), the country's central bank, is expected to unveil "confidence boosting" measures in its credit policy with a view to boost the growth momentum in the economy, say analysts. Yaga Venugopal Reddy, who took over as governor of RBI for a five-year term in September, will present Monday his first mid-term review of monetary and credit policy for the current fiscal year. Analysts say the biggest challenge for Reddy, who held the office of RBI's deputy governor until last year before joining the International Monetary Fund as an executive director, is to ensure continuity of the soft interest rate stance. They expect RBI to cut key interest rates to fuel industry investments in Asia's third largest economy and provide clues on the strength of the economic recovery in the current fiscal year. "The credit policy this time comes against the backdrop of increased industrial activity and a general sense of optimism about the economic growth," said T.K. Bhaumik, a senior economist with the Confederation of Indian Industry (CII). "The challenge before the central bank is to provide greater thrust to the feel-good-factor prevailing in the country's economy. The policy is expected to reflect the changes that have taken place on the macro-economic front," Bhaumik told IANS. According to Bhaumik, the policy should see a further cut in benchmark bank rate - rate at which RBI lends to other commercial banks - to ensure that commercial banks have enough money for lending as industrial activities continue to grow. "I think the industry would be comfortable if the RBI reduces the bank rate even by a marginal 25 basis points," he added. In April, the central bank cut the bank rate from 6.25 percent to six percent. The bank rate has been reduced from 11 percent to six percent in the last five years. The reduction in cash reserve ratio (CRR) -- the percentage of funds commercial banks must deposit with the RBI -- was also reduced from 4.75 percent to 4.50 percent. The then RBI governor Bimal Jalan had said the cut in CRR is a move towards the medium-term objective of reducing it to the statutory minimum level of three percent. Experts say although there have been substantial resources for lending with banks due to the prevalence of soft interest rate regime in the last few years, credit off-take had not picked up due to low level of economic activity. "But now with a sharp pick up in industrial production, a cut in bank rate and CRR will send strong positive signal to the industrial sector," said Jayant Bhuyan, secretary general of the Associated Chambers of Commerce and Industry. A cut in key interest rates by RBI will also give indication to commercial bankers to bring down their prime lending rates, the interest rate at which they lend money to their large customers, Bhuyan added. The central bank's policy is also expected to upwardly revise its economic growth forecast for the year ending March 2004 following improved monsoon rains in the current fiscal year. The Reserve Bank had said in April the domestic economy would grow by six percent in the current fiscal year, helped by a recovery in farm output and upturn in industrial and services sectors. Indian economy grew by a moderate 4.3 percent in the fiscal year ended March 31, 2003, mainly due to a 3.1 percent fall in agriculture produce, as the worst drought in three decades ravaged large parts of the country. Agriculture, accounting for about a quarter of the gross domestic product, is crucial to India's economy. Leading economic think tanks say economic growth in the fiscal year 2003-04 would hover between 6.5 percent and seven percent on the back of impressive farm output and increased industrial productivity. "If the RBI gives out a signal that it is optimistic about the economic growth by increasing its projection, it will definitely enthuse all others," said an official with a public sector bank. Bhuyan said the mid-term credit and monetary policy should also see further easing up of norms for investing overseas by resident Indians and corporate houses in view of record foreign exchange reserves. India's foreign exchange reserves witnessed further fresh inflow of $577 million during the week ended October 24, taking the total deposit to a whopping $91.89 billion.
Source: IANS
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