RBI reduces bank rate
Tribune News Service and agencies

NEW DELHI, March 1 — The Reserve Bank of India (RBI) announced this evening cuts in bank rate and short-term repo rate besides the cash reserve ratio (CRR) even as Finance Minister Yashwant Sinha had earlier in the day left the ball in the central bank’s court.

In a partial roll-back of its August measures the RBI cut repo rate to six per cent from eight per cent, bank rate to eight per cent from nine per cent and CRR to 10.5 per cent from 11 per cent.

While the industry had expressed its disappointment over the absence of interest cuts in the Union Budget 1999-2000, Mr Sinha had indicated that a check on the fiscal deficit would create a right atmosphere for the southward journey of interest rates.

The Confederation of Indian Industry (CII) immediately reacted and complimented the government for effecting an interest rate cut. "Within 48 hours of the presentation of the Budget, the announcement of slashing bank rates is truly unprecedented and historic", the chamber said in a statement.

It said the interest rate cut would give a boost to the industry which had been in the grip of a slowdown in the recent months. "The high interest rate has been one of the major stumbling blocks to cost competitiveness... with this reduction, the cost of production will be lowered, thereby improving its competitive edge to a large extent".

The industry also welcomed reduction in CRR, stating that it would release much needed funds for the productive sectors.

About Rs 2,500 crore would be released to the banking system by a 0.5 per cent cut in CRR to 10.5 with effect from the fortnight beginning March 13.

Fixed rate repo, introduced in late 1997 to suck excess liquidity in the wake of south-east Asian crisis’ cascading effect on foreign currency markets here, has been brought down to six per cent from eight per cent from March 3, 1999,

Bank rate, which is used as a reference rate by the RBI and to which export credit and general refinance facilities are linked, has been scaled down by one per cent to eight per cent close of business hours today.

On August 20, 1998, the RBI had raised CRR by one per cent to 11 per cent after having shelved phased reductions set out in the October 1997 monetary policy and hiked repo rate by a steep three per cent to eight per cent.

Repo rate has been acting as a floor in the call money market and is expected to have an impact when markets open on Wednesday after Holi holiday tomorrow with call rates likely to breach the artificial floor.

The 10 per cent surcharge on corporate tax and personal tax would help the government raise close to Rs 4800 crore besides another Rs 1800 crore would be raised through the Re one per litre cess on high speed diesel. "This would bring in some money into the government’s coffers".

However, he stated that the government is also "giving away" a huge amount by rolling back the cap on modvat and abolishing the five per cent special Customs duty.

Mr Sinha said, the government was also committed to boosting the rural economy and improving the standard of living in rural areas.

The government, he said, had decided to raise issue price of foodgrains and urea prices to ensure that food and fertiliser subsidies should not become a burden on the government in the following years.

On the industry’s demand for sectoral packages, Mr Sinha said the Indian industry must learn to compete and beat the rest of the world in competition.

"The industry is always asking for Excise duties to be brought down and Customs duties to be raised. This is no way to perform, let us not shy away from competition. The Indian industry is going through a phase of restructuring but Excise and Customs should not be looked upon as convenient tools to adjust and help the industry revive.

They have to learn to be competitive".

However, he stated that working groups have already been formed for the sectors and their suggestions would be implemented from time to time.

He further reiterated that there would be no rollback on taxation proposals ever.

On the downsizing of government, he said, "government need not do all that it is doing today. We have to shed functions and we are now looking at where exactly can we downsize the functions".

These steps would help India become an economic superpower. "Pokharan has to be followed up with many more Pokharan’s on the economic front".

Earlier the Union Finance Minister, Mr Yashwant Sinha, today indicated that the interest rates of banks were likely to go down in keeping with the Union Budget proposals.

He however, clarified that the Government would, in no way, influence the Reserve Bank of India (RBI) on the issue of lowering of interest rates.

"It is the domain of the RBI Governor and I would not like to impose anything on him but I do hope for the best", Mr Sinha said in his post-Budget reaction.

The Finance Minister said that domains of the government and the central bank was clearly defined and "we are responsible for creating the right kind of fiscal conditions to cut rates".

The industry has expressed disappointment over the fact that the budgetary proposals did not contain any indication towards lowering of interest rates to facilitate a better flow of bank credit to the corporate sector.

Senior Finance Ministry officials, however, pointed out that the RBI Governor might announce some cut in interest rates in the slack season credit policy in April this year to ease the supply side constraints of the industry.

Moreover, it has been pointed out that there would be greater participation by small investors in the capital market following the Budget announcements, and corporates would find it cheaper and convenient to raise fund from the capital market rather than the costlier bank finance route.

Such a phenomenon is most likely to exert a downward pressure on the bank lending rates and some announcements by the RBI Governor in this direction cannot be entirely ruled out.

The Finance Minister said that taking into account all circumstances it will be possible for the RBI Governor to take appropriate steps. "But it is entirely his domain", he added.

Mr Sinha defended the imposition of 10 per cent surcharge on individual and corporate Income Tax saying that it was only a temporary phenomenon.

In an informal chat with media persons last evening, Mr Sinha said that world over there was trend to maintain stable tax rates and the government did not want to tamper with it.

The surcharge on the other hand was a temporary tool for revenue mobilisation and "if situation improves and I am confident then the surcharge will be abolished in next 12 months".

The revenue mobilisation through surcharge on individual and corporate income is estimated to be to the extent of Rs 3,100 crore and this would not be shared with the states.

Addressing captains of Indian industry at a meeting organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) here today Mr Sinha said that the most difficult and intractable problem confronting the Indian economy today is the management of public finances.

"Our credibility as a country was to prove that we are setting in motion a course for fiscal correction for fiscal and revenue deficit", the Finance Minister said.

Regarding the Excise restructuring exercise, Mr Sinha said that extreme care has been taken to avoid tinkering with individual commodities and perhaps for the first time the Budget could not be identified with a particular section of industry.

"By abolishing ad hoc concessions, we are trying to move to more rule based system to bring in greater transparency", the Minister observed.

Elaborating on the underlying philosophy that went behind the preparation of the Budget, Mr Sinha said that the declared objective is take India to central VAT system.

Moreover, conscious efforts have been made to stimulate rural demand and "this can be done only by improving the quality and income of the rural people".

On the gold bonds scheme, Mr Sinha said that it was a measure primarily aimed at making good utilisation of idle assets.

However, no amnesty scheme has been announced with it as it would mean a "discrimination against the honest tax payer. One cannot run a system of taxation on some kind of amnesty scheme every year", he said.

Urging the domestic industry to adjust to the growing demands of competition, Mr Sinha said that "Indian industry has to learn to compete and beat the best of the world in competition".

"There must come a time when Excise and Customs duty is not seen as adjusting tools for the industry ", he said.

Mumbai: RBI governor Dr Bimal Jalan said with lower inflation in recent weeks, slow credit off-take and lower borrowing programme announced in 1999-2000 Budget, "RBI’s judgement now is that conditions are right for such a move".

Such steps by the RBI were expected by bankers as indications were provided in the Union Finance Minister’s Budget speech.

So far the State Bank of India (SBI) and the Bank of India (BoI) have announced lowering of PLR to 12 per cent, while Bank of Baroda would decide later this week to bring down their PLR to the same level. The SBI and the BoI have also reduced their medium term PLR to 12 per cent.

IndusInd Bank was not contemplating immediate cut in PLR, but would consider and review the matter, its Chairman Soloman Raj said.

On the foreign exchange rate, Mr Jalan said he did not want to comment, except that there was no change at all in the RBI’s policy with regard to management of exchange rate.