Annual Report 2002-2003

Monetary Policy Measures

The macro-economic essentials of the Indian economy continued to exhibit their inherent flexibility even in the face of upward pressure on inflation rate due to rise in oil prices following the Iraq war, drop in agricultural output and a sluggish revival in the industrial sector. The present monetary system is having excess liquidity, low real interest rates and low spreads. The Monetary & Credit Policy 2003-04 was announced on the postulation that the secondary and tertiary sectors will continue to grow whereas the primary sector will show signs of revival following a balanced spatial distribution of monsoon resulting in around 6% growth in the real GDP during financial year 2003-04.

Highlights

•	Bank Rate reduced by 25 basis points from 6.25% to 6.00%
•	CRR reduced by 25 basis points to 4.50%.
•	RBI to safe guard financially sound banks from liquidity scares by providing liquidity support facility
•	PLR to be arrived at on the basis of actual cost of funds.
•	Tenor linked PLR to be discontinued and lending rates to be arrived at by adding 'term premia' and 'risk premia' to the benchmark PLR.
•	Limit to the extent of direct housing loans for construction of houses by individuals as part of priority sector lending raised from Rs 5 lakhs to Rs 10 lakhs even for semi-urban and rural areas.
•	Non-bank entities permitted to provide unconditional and irrevocable guarantee as credit enhancement for Commercial Paper issue.
•	Indian corporate and resident individuals permitted to invest in rated debt instruments abroad.
•	Entire Investment Fluctuation Reserves to be treated as Tier II Capital, thus enabling banks to improve their capital adequacy ratio.

Implications

The reduction in bank rate came as per the market trend. Reduction in CRR would infuse additional liquidity in the already liquidity flushed system. Hence, it may marginally enhance the profitability of the banks by assisting the government borrowing programme. Linking Banks PLR to actual costs and abolition of the system of tenor linked PLRs will make the pricing system more transparent and more meaningful. Enhancement in the limit of housing loans to individuals in the rural and semi urban areas to be considered as a part of the priority sector lending, will lead to increased availability of housing loans in rural and semi urban areas. Permitting non bank entities to provide guarantees for credit enhancement for CP issues will give more flexibility to the lower rated issuers by using credit enhancements and lowering their borrowing costs. Permitting Indian corporate and resident individuals to invest in debt market abroad will provide additional investment opportunities to the investors. Overall the thrust of the monetary and credit policy has been to support the tepid pick-up in industrial activity, enhance transparency in the banking system and to take the rupee closer to full convertibility.