'Interest tax withdrawal will lead to lower transaction cost for banks'

PANAJI, MARCH 4. The Reserve Bank of India today hinted at a reduction in interest rates saying the withdrawal of interest tax, estimated to cost the Exchequer Rs. 1,000 crores, would lead to a fall in transaction cost of banks.

``The withdrawal of interest tax in this budget is also a significant measure as it leads to reduction in the transaction cost of banks and the price, to the extent the tax is passed onto the borrowers through interest rates," Mr. Y. V. Reddy, Deputy Governor of the RBI, said.

``Gains to the financial system as a consequence would be significantly higher than Rs. 1,000 crores because of savings on account of transaction and compliance cost," Mr. Reddy said addressing the annual conference of primary dealers and fixed income money market dealers here.

He said the borrowings programme of the Government for the next year was realistic given the fact that ``political and economic uncertainties such as elections, Asian crisis, sanctions and Kargil were behind us.''

The Deputy Governor said the RBI would seek amendments to lower statutory minimum in respect of cash reserve ratio (CRR) and statutory liquidity ratio (SLR) when the Government brings legislative changes to give more operational flexibility to the central bank as promised by the Finance Minister, Mr. Yashwant Sinha, in the budget speech.

The Deputy Governor said the internal working group set up by the central bank had also suggested empowering the RBI to define demand and time liabilities and securities eligible for SLR purposes.

Mr. Reddy said other suggestions of the group, which could be taken up to give more flexibility to the RBI, were provisions for future separation of monetary and debt management functions and powers to notify institutions for inclusion in the banking system for computation of liabilities.

He said the RBI expected the Government to soon pass a Bill to allow electronic mode of transfer of title of government securities and facilitate pledging of securities without actual transfer.

On the proposed Fiscal Responsibility Act, to put a statutory cap on government's borrowings and expenditure, Mr. Reddy said the working group on FRA met two days ago to discuss the draft legislation. ``The matter is likely to be considered in a couple of weeks by the Sarma Committee, the committee to which the Finance Minister made a reference in the budget speech. We should expect high priority and expeditious processing of the matter,'' he said.

He said the RBI was contemplating changes in liquidity adjustment facility, institutional arrangements such as clearing and settlement systems and debt market operations of RBI, including two way quotes and procedural aspects of the repos market.

Mr. Reddy said the announcement by the Finance Minister that a portion of disinvestment proceeds would be used for retiring government debt was a noteworthy development.

However, the modalities of this was yet to be worked out in detail, he added.

Stating that the borrowing requirements of the Central Government for the remaining part of the current fiscal would be in the range of Rs. 4,000 to 5,000 crores, Mr. Reddy said the RBI saw "absolutely no reason as to why the borrowing needs of the Centre or States should not be met as smoothly this month as it has been until now.''

On reports that the Government would raise the remaining borrowing needs of the Central Government only through auctions, leaving out private placement, he said the RBI saw no basis for such assumptions.

Mr. Reddy said the actual requirement of the Government, the instruments and methods for raising the funds were yet to be firmed up.

- PTI

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