RBI cuts CRR, bank rates

By Our Special Correspondent

MUMBAI, OCT. 22. Indicating a low interest rate regime, the Reserve Bank of India (RBI) cut the bank rate by 50 basis points to 6.5 per cent - the lowest ever since May 1973 - from the close of business today.

It also announced a two per cent cut in the Cash Reserve Ratio (CRR) from 7.5 per cent to 5.5 per cent in two phases from the fortnight beginning November 3. In the first phase CRR would be brought down to 5.75 per cent effective from the fortnight beginning November 3 and to 5.5 per cent from the fortnight beginning December 29, 2001.

Announcing the Mid-Term Review of Monetary and Credit Policy for the year 2001-02 here today, the RBI Governor, Dr. Bimal Jalan, said that the combined impact of these two measures will augment the lendable resources to the banking system to the tune of around Rs. 8,000 crores (about Rs. 6,000 crores effective from November 3). The central bank has also removed most of the exemptions available on CRR. In the present circumstances RBI's policy is to ``create an environment of availability of funds at a lower interest rate''.

``While the proposed CRR reduction is consistent with the medium term objective and the current circumstances of relatively low level of economic activity and reasonable inflation, the RBI will continue to use CRR instrument in both directions for liquidity management in addition to other instruments,'' Dr. Jalan said.

Despite several uncertainties, he felt that the fundamentals of the economy as reflected in moderate inflation, stable and low interest rates, high foreign exchange reserves, large foodgrain stocks and competitive advantage of information technology related industries are still strong. ``The prospects for agricultural growth during this year remain positive,'' he said, adding, ``global and domestic inflationary outlook currently continue to be favourable.''

Dr. Jalan, therefore, proposed to continue with the overall stance of annual monetary policy announced in the April statement for the remaining half of the current year and ensure that all legitimate requirements for credit are met consistent with price stability. Unless circumstances change unexpectedly, RBI will also endeavour to maintain the current interest rate environment.

Considering various factors and assuming no further serious disruption in the world economic environment, at this stage, Dr. Jalan felt that a projection in the range of 5 to 6 per cent growth rate in the current year may be ``reasonable'' for the purpose of credit and monetary management. Very few countries would show a growth rate of this order in the current year, he added. The annual inflation rate is 3.2 per cent as against 7.4 per cent a year ago. The Centre's fiscal deficit upto August 2001 was higher and constituted about one half of the budget estimates for the current year.

Dr. Jalan indicated that the growth rates in money supply and aggregate deposits of scheduled commercial banks in the current financial year were slightly higher than the growth rates observed a year ago. He said that the relative attractiveness of bank deposits has improved and if this deposit growth continued it may pose a challenge to the banking system in deploying resources, particularly in the context of sluggishness in credit and investment demand. He said that late in September and early October, there had been some pick-up in non-food bank credit and other resource flows to commercial sector from the banking system.

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