BOMBAY, 4 November — Reserve Bank of India Governor Dr. Bimal Jalan presented the midterm Monetary and Credit Policy for 2002-03. And again he has taken the middle path and has managed to do the impossible — keep almost everyone happy!

Jalan has however presented a very practical policy that has been called in corporate circles, as a very “politically correct” policy. Tinkering with the bank rates, repo rates and Cash Reserve Ratio (CRR), Jalan has made this a happy festival (Diwali) for the great Indian middle class by leaving the savings rate untouched. He has made home and auto loans cheaper, and also made funds cheaper for exporters. Jalan is seeking to prop consumer demand while signaling to the banks that interest rates must be brought down. He has infused more liquidity into the markets, thereby urging industries to set up new greenfield projects.

Post this credit policy, bank rate as well as CRR are now at their three-decade lows. RBI has reduced CRR, which denotes the percentage of net funds that banks have to park with RBI, from 5 percent to 4.75 percent effective from the fortnight beginning Nov. 16, 2002. The cut is expected to bring around Rs. 30 billion into the market.

Jalan has reduced the bank rate by 25 basis points to 6.25 percent the lowest since ‘73, and cut the repo rate again by 25 bps to 5.5 percent. Bank Rate is the rate at which banks borrow from RBI and the repo rate is the rate at which RBI borrows from banks. What these rates cuts mean in a nutshell is that there will be easier credit but on the downside, deposits may earn lesser interest and the pensioners will be hit.

Many say that the rate cuts have been symbolic. But the impact of these cuts will be far reaching. Soon after the policy was announced, bank chairmen rushed to announce their rate cuts. The Union Bank of India and the Bank of India were among a string of banks which cut their deposit rates immediately. Union Bank cut its deposit rates by around 25 to 50 basis points and is to soon announce a cut in the PLR by a maximum of 50 basis point in the next few days. The State Bank of India, India’s largest commercial bank, reduced deposit rates across all maturities by 50 basis points. Its highest deposit rate is at 7 percent, and the lowest at 4 percent. The Industrial Development Bank of India cut the rates on its Suvidha deposits and forthcoming bonds by 25-50 basis points, Bank of India has cut its less than three years deposit rates by 25 basis points from 6.75 percent to 6.50 percent. Its long term deposit rates (three years and above) have been cut by 50 basis points from 7.25 percent to 6.75 percent. It has also cut its NRE deposit rates. The Central Bank cut its PLR by 50 basis points and the State Bank of India and the Bank of Baroda too cut their deposit rates. SBI is now offering 7 percent interest rate on the longest term deposit, while Bank of Baroda’s highest deposit rate is 6.5 percent.

The most unexpected thing in the credit policy was the reduction again in the CRR. Explaining this, Jalan said that this was to assure adequate liquidity in the system and move toward the 3 percent CRR level. With these measures, Jalan feels that credit recovery will become faster and easier and will also place the economy on a high-growth path.

Throughout the governor repeatedly mentioned the inflexibility of the interest rate structure in the country. The banks have been fending off this accusation by saying that the high operating expenses, higher ratios of non-performing assets, regulated small savings/ provident fund rates and the large borrowing program of the government have kept the interest rates inflexible.

Hence, the banks have been given freedom to decide the period of reset on variable rate deposits. Banks will offer two options on fixed deposits — fixed and floating. Customers will now have a choice.

Jalan has also put forth a proposal to introduce anonymous, screen-based, order-driven trading in government securities in stock exchanges. This, if put into effect, could mean the introduction of retail trading in gilts. Investors will be able to trade in government bonds like equities.

Jalan’s midterm credit policy has been more or less in line with expectations, maintaining the lower interest rate regime with impetus on more economic growth.

There is no doubt that economy will most certainly receive a setback this fiscal, due to the vagaries of nature — poor monsoons or floods in various parts of India. But Jalan agrees to this too as he has placed the Gross Domestic Product (GDP) growth rate for 2002-03 between 5.0-5.5 percent lower from 6.0-6.5 percent.