ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Stuck in a Groove

THE Reserve Bank's monetary policy continues to be guided by a narrow stabilisation perspective when the need is for a vigorous developmental thrust. Some of the measures forming part of this week's credit policy announcement, such as the restriction of the cash credit component of permissible bank finance for large borrowers to 75 per cent, extension of the ban on bridge loans against public issues and borrowing from the market to all companies, reduction of overall bank borrowing limits of non-banking financial companies (NBFCs) and narrowing of the export credit refinance facility for banks by about Rs 2,000 crore are apparently intended to enforce discipline in the deployment of bank credit. But some other steps such as raising banks' maximum fixed deposit rate from 11 per cent to 12 per cent and restricting rediscounting by banks of commercial bills and derivative usance promissory notes to a minimum period of 15 days may in the end prove counterproductive. Likewise, the permission granted to private sector mutual funds to operate in the call money market will go against the RBTs objective of correcting maturity mismatches in banks' assets and liabilities. More important, it will hamper the transmission of credit policy impulses to the real economy. It is also a pity that the RBI's initiatives on what may be described as the development finance front are restricted to the announcements contained in the finance minister's budget speech: banks' contribution to the new rural infrastructural development fund to be established in NAB ARD, provision of credit by a consortium of banks to the Khadi and Village Industries Commission and extension of NAB ARD refinance for loans to primary weavers' co-operative societies, hidierto restricted to co-operatives, to commercial banks.

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