Nothing Monetary About The Credit Policy

Ever since Bimal Jalan took over as the Reserve Bank of India (RBI) governor, November 22, 1997 to be precise, he has changed the rules of the game. Jalan has rarely used the credit policy as a platform to announce monetary measures.

For instance, the RBI governor changed the repo rates 10 times during his tenure. Only once, in April, 1998, was it part of the credit policy. The rates of special repo, introduced in June as part of the liquidity adjustment facility, were changed innumerable times.

Similarly, Jalan cut the cash reserve ratio (CRR) on the day he joined. Since then it has been altered ten times. Of which, only twice -- in April 1999 and October 1999 -- was it part of the monetary policy.

Further, Jalan changed the benchmark bank rate seven times and only twice -- in April 1998 and October 1998 -- it was under the monetary policy package.

"These credit and regulatory measures will continue to be subject to change at short notice in the light of actual domestic developments and emerging external market conditions," says Jalan. He has also rechristened the busy-season October policy as "mid-term review", shorn of any hype and hoopla.

With the delinking of monetary measures from the credit policy, the role of the bi-annual ritual is now confined to addressing structural changes and pushing financial-sector reforms.

The last credit policy, announced on April 27, had emphasised that the central bank would continue to implement measures "if and when required". The series of steps taken by the RBI in the last six months, against the backdrop of a volatile forex market triggered by "certain international developments," proved the point.

The Reserve Bank started the fiscal by lowering the interest rate. In the April credit policy, it cut the bank rate as well as the CRR to complement Yashwant Sinha's budget. However, the central bank could not continue with it as the forex market turned volatile over a combination of factors including low capital inflow and rising oil prices.

After a month, on May 25, the RBI came out with a series of policy actions to stem the fall in rupee: an interest rate surcharge of 50 per cent of the lending rate on import finance; minimum interest rate of 25 per cent per annum on the overdue export bills. Besides, it advised banks to buy dollars on genuine requirements. It also indicated that it would meet partially or fully the government debt service payments directly as considered; promised that some arrangements would be made to meet, partially or fully, the foreign exchange requirements for the import of crude by Indian Oil Corporation. Finally, the central bank affirmed its intention to continue selling dollars through the State Bank of India in order to keep the forex market liquid.

On July 21, the RBI made a sharp about turn and reversed its policy on bank rate and CRR as a part of its liquidity tightening measure. It increased the bank rate by a percentage point to 8 per cent.

Simultaneously, it increased the CRR requirement of banks by 0.5 per cent in two phases, effective July 29 and August 12. With this, the CRR went up to 8.5 per cent.

When these measures failed to stem the fall of the Indian currency, on August 14, the apex bank asked exporters to reduce their outstanding foreign currency balances by half to prop up dollar inflows. The deadline was set on August 23.

The liquidity adjustment facility (LAF), which the RBI proposed in its credit policy on April 27, took effect on June 5. The facility, which was meant for bridging the temporary mismatch in the daily money market, was aggressively used by the central bank to suck out extra liquidity to check speculation in the forex market. The RBI had hiked the repo rate from 8 per cent on July 8 to 15 per cent by August 18 in stages.

As part of its rupee support agenda, the RBI also asked banks to repatriate the entire proceeds of their global depositary receipts and American depositary receipts as soon as they complete the issue process.

As the rupee stabilised for a brief period after that, the RBI started reducing the rate. The repo rate fell to 10 per cent on September 11.

As fresh round of instability plagued the forex market, RBI kept the rate unchanged till very recently. With the outlook in the market improving substantially, thanks to the State Bank of India's proposed Millennium India Deposit scheme and the US decision to supply oil from its strategic reserve, the central bank dared to reduce the repo rate once again on October 3. Since then, it has reduced the repo rate by a percentage point to 9 per cent as on October 6.

As call rates went up in August and with it the yield on government securities, the RBI on August 23 offered primary dealers (PDs) a "switch facility" to swap their long-dated holdings with liquid 364-day treasury bills to take the pressure off from the overnight market.

Early this month, it introduced a special fund facility for security settlement for banks and PDs to facilitate settlement of securities transactions in case of a gridlock.

Besides, the central bank unveiled a series of draft reports on various subjects, ranging from banks' investments in stock markets to change in investment norms on global lines as well as new guidelines for non-SLR securities.