Key interest rates left unchanged in Credit Policy
Mumbai: The RBI helmsman, Dr Y. Venugopal Reddy, on Monday left key interest rates untouched.
The mid-term review of Monetary and Credit Policy 2003-04 has left unchanged the bank rate, cash reserve ratio and the overnight repo rate while GDP for the current year has been pegged higher at 6.50-7 per cent "with an upward bias". The policy, perceived to be cautious and non-populist, has forecast a stable interest regime for quite some time though for the common man there is nothing on offer.

In an interactive session with the media here today following his maiden Credit Policy, a jovial Dr Reddy said, "Dr Jalan's measures in the April policy have all served the economy well there is no need to tinker with it... There is every reason to continue the same stance." He said a review of the economy indicated all "very, very positive developments" compared to the trends in April 2003, like an upward GDP, downward inflation, improvement in the investment climate, strong sentiment in the financial markets, expectation of credit growth and strength in the external sector.

In the last policy of April 2003, Dr Bimal Jalan had reduced the Bank Rate to 6 per cent from 6.25 per cent and in February 2003, the repo rate had been snipped to 4.5 per cent (5 per cent).
The cash reserve ratio has been left untouched this time at 4.5 per cent in view of the current liquidity situation although the objective to reduce the same to 3 per cent continues, states today's policy.

The central bank is upbeat on the GDP growth rate; it has upped its projection to 6.5-7 per cent, with an upward bias, over the earlier number of 6 per cent. The policy rationale: "It is reasonable to expect higher GDP growth based on the growth prospects across the sectors of the economy, and assuming the continuance of good performance in industry and some acceleration in exports reflecting the anticipated global economic recovery."

Inflation rate, on a point-to-point basis is expected to be lower at 4-4.5 per cent, with a downward bias, down from previous projections of 5 to 5.5 per cent. Lower inflation rate figures could fuel hopes for rate cuts in the future, say bankers.

On unhedged exposures in the foreign exchange market, which has been a nagging concern, the RBI has mandated banks to hedge all foreign currency loans to corporates above $10 million except for exporters who have a natural hedge.

A timeline has been laid out for the implementation of the Real Time Gross Settlement System (RTGS), with the fully functional RTGS system expected to be operational by June 2004 with the stand-alone system being operationalised in January 2004.

The RBI is putting up for public debate a "Report of the Internal Group on Liquidity Adjustment Facility (LAF)." It could see modifications to LAF and the open market operations of the central bank. The suggestions, the policy said would be taken into consideration in finalising the guidelines on this liquidity-modulating instrument.
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Hedging made compulsory for foreign currency loans over $10 m
Mumbai: Corportes will have to hedge all foreign currency loans above $10 million. In its mid-term review of the Credit Policy, the RBI has made hedging mandatory for all foreign currency loans. According to the RBI, unhedged corporate borrowings have been a cause for concern over the past couple of years. Aside from the significant risk entailed to corporate balance sheets, it is also likely to impact the asset quality of banks in some cases.

However, banks are allowed not to insist on a hedge, in cases where forex loans are extended to finance exports, and the borrower has uncovered receivables to cover the loan amount. Hedging is also not insisted upon, in cases where forex loans are extended for meeting forex expenditure.

Speaking to presspersons here on Monday, Dr Y.V.Reddy, RBI Governor, said, "Earlier we were urging and exhorting, but now we are making it amply clear.''

The apex bank's latest measure has evoked mixed reactions from bankers. While a section of bankers have already been insisting on borrowers hedging their foreign currency loans, some others are of the opinion that such a measure from the RBI will impede corporate liberty to act on its own view on the currency.
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