[sbinews] RBI Governor announces Annual Policy Statement for 2004-05 (RBI's Website)

  • From: "Rajendra S. Pai" <rspai9@xxxxxxxxx>
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Tue, 18 May 2004 00:12:27 -0700 (PDT)

RBI Governor announces Annual Policy Statement for
2004-05 (RBI's Website) 
Statement broadly follows the pattern already set in
the previous years.

Domestic Developments

GDP growth for 2004-05 projected at 6.5-7.0 per cent. 

Assuming no significant supply shocks and appropriate
management of liquidity, the inflation rate projected
for policy purposes at around 5.0 per cent during

Growth in reserve money and Money supply (M3) were
higher during 2003-04 reflecting capital inflows; the
expansionary impact of foreign currency assets,
however, was neutralised to a large extent by
substantial open market operation (OMO) including
sustained repo operations under LAF.

Sustained pick-up in non-food credit since September;
total flow of resources to the commercial sector was
higher than last year. 

Government market borrowing programme in 2003-04
completed at a much lower cost; while noting reduction
in fiscal deficit, need to step up capital expenditure

Further reduction in interest rates in money and
government securities markets observed in 2003-04.

Public sector banks have reduced their BPLR in the
range of 25-100 basis points. 

RBI to continue with its policy of active liquidity
management; Market Stabilisation Scheme (MSS), is an
additional tool.

External Developments

Global economic recovery has broadened and
strengthened faster than expected despite some

The exchange rate of the rupee appreciated vis-à-vis
US dollar but depreciated against the Euro, Pound
sterling and Japanese yen in 2003-04. 

India?s foreign exchange reserves increased by US $
37.6 billion during fiscal 2003-04 and are at US $
118.6 billion by May 7, 2004. 

India?s exports in US dollar terms increased by 17.1
per cent while imports by 25.3 per cent; the current
account expected to register surplus during 2003-04
for the third year in succession.

Exchange rate management, as in the past, based on
flexibility, without a fixed or pre-announced target,
but with ability to intervene.

The most distinguishing feature of the external sector
during 2003-04 relates to the large capital flows with
its inevitable implications for the conduct of
domestic monetary policy and exchange rate management.

Overall Assessment

Despite uncertainties, India?s position among the top
performers globally in terms of GDP growth is expected
to continue during 2004-05. 

As regards prices, despite overhang of problems on
account of oil prices and large domestic liquidity,
price situation unlikely to cause concern to macro
stability during 2004-05. 

Need to overcome the bottlenecks in flow of bank
credit to agriculture and small & medium enterprises

Restructuring of rural banking sector stressed for
enhancing the quality, purposiveness and reach of
banking in India. 

Whereas the Reserve Bank will continue to provide a
policy environment that avoids excessive and
destabilizing volatility as a public good, market
participants were urged to take into account the
portfolio risks arising from any unexpected
developments and provide adequately for them.

The outlook for the external sector accords comfort to
the conduct of public policies.

Stance of Monetary Policy

Monetary management during 2003-04 broadly in
conformity with the stance of the policy set out for
the year. 

Projected expansion of money supply (M3) at 14.0 per
cent with credit growth by 16.0-16.5 per cent during

Noticeable uncertainties including geopolitical risks
impacting on international oil economy reckoned while
designing the stance of monetary policy. As such, the
inflationary situation needs to be watched closely and
there could be no room for complacency on this count. 

The overall stance of monetary policy for 2004-05 will
be: (i) provision of adequate liquidity to meet credit
growth and support investment and export demand while
keeping a very close watch on the movements in the
price level. (ii) Consistent with the above, while
continuing with status quo, RBI to pursue an interest
rate environment that is conducive to maintaining
momentum of growth and, macroeconomic and price


Bank Rate kept stable at 6.0 per cent.

Repo Rate unchanged at 4.5 per cent.

Revised LAF scheme operationalised.

The entire export credit refinance was made available
at reverse repo rate.

Almost all banks have adopted the new system of BPLR
and the rates are lower from their earlier PLRs.

Banks are encouraged to align the pricing of credit to
assessment of credit risk to improve credit delivery
and credit culture.

RBI accepted some recommendations of the interim
Report of Vyas Committee for implementation, e.g.,
loans for storage facilities under priority sector,
securitised agricultural loans as priority sector
lending, waiving margin/security requirements for
certain agricultural loans up to a limit, NPA norms
for crops loans aligned to crop seasons. 

Development of mechanism for debt restructuring for
medium enterprises on the lines of corporate debt

Definition of infrastrucutre lending broadened. 

Working Group constituted on Credit Enhancement by
State Governments for financing infrastructure.

A Gold Card Scheme for creditworthy exporters drawn

Various restructuring options being considered by the
Government and other stakeholders for rationalising
the structure of RRBs - Vyas Committee is also looking
into restructuring of RRBs.

Limit on the lending of non-bank participants in the
call/notice money market reduced to 45 percent
effective June 26, 2004.

Automated value-free transfer of securities proposed
between market participants and the CCIL under CBLO.

RBI constituted Working Group to review the
performance of negotiated dealing system (NDS).

Clearing of OTC derivatives through CCIL being

CCIL to work out arrangement for settlement of trades
in non-SLR debt instruments for NDS members. 

Discussion paper on Capital Indexed Bonds being put in
public domain.

The ECB limit already enhanced to US $ 500 million
under the automatic route for investment in the real

Resident individuals already permitted to remit freely
up to US $ 25,000 per calendar year. 

Indian corporates and partnership firms allowed to
invest overseas upto 100 per cent of their net worth. 

Banks allowed to raise long-term bonds to finance

The extant limit on unsecured exposures for banks

Exposures on all public financial institutions (PFIs)
to attract a risk weight of 100 per cent. 

Banks required to maintain capital charge for market
risk in a phased manner.

Banks to draw a road map for migration to Basel II.

Banks to make higher provisioning according to the age
of NPAs.

Banks/FIs to provide credit information to CIBIL. 

Banks to fully adhere to the KYC policy for opening
new accounts.

Report of the Working Group on Financial Conglomerates
is being put in public domain.

Risk based supervision extended to more banks.

Fresh licences to UCBs only after a comprehensive

Report of the Working Group on Development Finance
Institutions is being put in public domain.

Technical Group to evaluate the regulatory and
supervisory systems deployed by refinancing
institutions (RFIs).

Waiver of service charges on banks for electronic
funds transfer and electronic clearing services.

RBI sets up a Board for Payment and Settlement

RBI expects most commercial banks to join the RTGS
system by June 2004. 

A Working Group on Electronic Funds Transfer for
Capital Market constituted. 

Single window services for all transactions in RBI
cash department. 

Operationalisation of On-line Tax Accounting System by
June 2004. 

Standing Committee on Procedures and Performance Audit
on Public Services has submitted four Reports, being
put in the public domain. 

The recommendations of the Advisory/Technical Groups
on International Financial Standards and Codes are
being pursued

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