RBI reduces key interest rates to spur economic growth

Wednesday, 30 April 2003, 07:00 Hrs
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NEW DELHI: The Reserve Bank of India (RBI) Tuesday reduced benchmark interest rates to ensure that banks have enough money for lending when economic activities pick up in the current fiscal.

The RBI hoped the Indian economy would grow by six percent in the fiscal year ending March 2004, helped by a recovery in farm output and upturn in industrial and services sectors.

India's economy expanded by a moderate 4.4 percent in the fiscal year ended March 31, 2003, down from 5.6 percent in the preceding year, as the country's worst drought in three decades sharply reduced agricultural output.

In a widely expected move, the central bank cut the key bank rate and cash reserve ratio (CRR) by 0.25 percent points in its monetary and credit policy for fiscal 2003-04 beginning April 1.

The reduction in bank rate - at which the central bank lends to other commercial banks - from 6.25 percent to six percent would be effective from Tuesday.

RBI governor Bimal Jalan said the bank rate had been reduced from 11 percent to six percent in the last five years.

"This is the sharpest reduction in the bank rate since independence. Unless the domestic and international circumstances change, the policy bias in regard to the bank rate is to keep it stable until the mid-term review of October 2003," he said.

The bank rate has been reduced in stages from eight percent in July 2000 to 6.25 percent by October 2002, the lowest rate since May 1973.

The reduction in CRR -- the percentage of funds commercial banks must deposit with the RBI -- from 4.75 percent to 4.50 percent will come into effect from the fortnight beginning June 14.

Jalan said the cut in CRR is a move towards the medium-term objective of reducing it to the statutory minimum level of three percent.

The RBI governor said the central bank would continue to keep a close watch on the domestic and external situation to conduct its monetary management, although the "overall monetary conditions are at present comfortable".

The Indian industry has been pitching for lowering of the benchmark bank rate and CRR for the last few months in view of the sluggishness in the overall economy and relatively lower level of credit off-take.

The RBI said it was committed to maintain adequate liquidity in the market with a preference for soft interest rates "to the extent the evolving situation warrants".

The central bank placed the real gross domestic product (GDP) growth in 2003-04 at about six percent "after taking into account the current trends" in the various macroeconomic factors.

"Subject to satisfactory spatial distribution, if rainfall is around 96 percent of the long-term average, recovery in agricultural output may be over 3.1 percent during 2003-04," the central bank report said.

"A recovery in agricultural output coupled with the continuance of the upturn in the industrial and the services sectors should help in achieving the projected growth for 2003-04.

"The uncertainty regarding the economic outlook, however, remains high due to the ongoing geopolitical tensions," said the RBI report.

"Its adverse impact on the oil markets could have a negative impact on economic activity throughout the world, particularly on oil importing emerging markets," it added. India imports 70 percent of its oil requirements.

The central bank said it was necessary to aim for "fiscal consolidation and substantially lower fiscal deficits" to facilitate efficient monetary and debt management operations.

The fiscal deficit of the federal government, which was budgeted at 5.3 percent of GDP for 2002-03, was revised upwards to 5.9 percent. For the fiscal year 2003-04, the fiscal deficit is placed at 5.6 percent.

The RBI said despite adverse external developments India's foreign exchange reserves continued to record healthy growth during 2002-03 on account of improvement in the current account as well as strong capital and other inflows.

India's foreign exchange reserves increased by as much as $21.3 billion in one year, increasing from $54.1 billion in March 2002 to $75.4 billion by March 2003.

"This is the highest increase recorded in a single year and has occurred despite substantial increase in the international oil prices and other unfavourable developments," said the report.

Source: IANS
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