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RBI governor walks a tightrope

In the absence of the Union Budget to broadly guide him, Reserve Bank of India Governor Dr Bimal Jalan may find it difficult to provide a specific direction to his policy measures in the first-half monetary and credit policy for 1998-99 to be announced in Bombay on Wednesday morning.

Dr Jalan has to walk a tightrope, particularly since he has to facilitate the massive government borrowing programme of Rs 860 billion from the market where players and intermediaries are demanding more funds through a cut in the cash reserve ratio but at lower interest rates through a reduction in bank rate.

Besides, the governor is expected to take care of various other segments of the economy, such as an uncertain capital market and sagging export market. While the industrial and manufacturing sectors are demanding more bank credit at reasonable interest rates, the governor has to skilfully show the way to channelise more funds from banks and financial institutions to the core and infrastructure projects which need huge long-term finances.

The only advantage the governor had during the framing of the RBI policy was in the reports of two working committees -- the Gupta Commitee on rural and agriculture lending, and the Khan Committee on harmonisation of working of banks and financial institutions. Both suggested a series of restructuring measures for the Indian banking sector as well as financial institutions in order to enhance their exposure in needy areas like infrastructure development projects, rural and agriculture financing and greater integration of banks and FIs towards universal banking concept.

According to bankers in Bombay, it would be a balancing act for the RBI chief to evolve policy measures that would satisfy the new government at the Centre and also meet the expectations of the people at large.

They said containing money supply and inflationary pressure on the economy would be a tough job, particularly when the government is facing a growing fiscal deficit and is absorbing massive finances from the system. This may lead to instability in rupee value in the foreign exchange market.

They felt the RBI would work towards greater integration of foreign exchange and money market and deepening the government securities market by allowing short selling and forward trading of securities. The RBI is likely to cut CRR, reduce bank rate, increase export refinance facility, provide greater incentives for capital market growth and enhance bank finances to agriculture and rural sectors, they feel.

Bank of Baroda chief economist Dr S Chakraborty said the first-half RBI monetary policy would reflect some measures of the forthcoming Union Budget which may call for redefining the concept of priority sector lending by commercial banks and reviewing the role, structure and operations of financial institutions and banks in the emerging environment.

Chakraborty said there was also a need to change the administrative policy of commercial banks who found it difficult to go to the board each time for getting an approval to changes in the Prime Lending Rate.

The frequent changes in CRR, bank rate and refinance limits in recent months had posed problems to the banks in making changes in their policy measures.

Dena Bank chairman Ramesh Mishra said interest rates on export refinance should be linked with the bank rate so that it became competitive and attractive. In the recent past, while the bank rate had come down, it was not reflected in the refinance rate.

He also emphasised that the norms of priority sector lending should be reviewed, and the financing of rural and core sector should be taken out from the priority sector norms. The RBI's policy would have to deal with the suggestions given by the Gupta and Khan committees on the role of bank financing and operation, he added.

UNI