Credit Policy RBI – Changes in Bank Rates

In April 1997, Reserve Bank of India felt the necessity of making the Bank Rate an effective signal rate as well as a reference rate. Accordingly, the Bank rate was reduced by one percentage point to 11% per annum. The objective was that changes in the Bank Rate reflect the stance of monetary policy. Reserve Bank also revised interest rates on all advances from the Reserve Bank and also the penal rate on shortfalls in reserve requirements that are linked with the bank rate. Interest rates on other categories of accommodation form Reserve Bank, which were not linked with the Bank rate, were now linked with it. Ceiling on deposit rates up to 1 year was also linked with the Bank Rate. The role of Bank rate as an effective signal rate was restored.

On June 26, 1997 Reserve Bank reduced the Bank rate by one percentage point to 10% with a view to align the Bank rate to the changing conditions. Consequently, all rates linked with the Bank rate were reduced by one percentage point. With effect from October 22, 1997, bank rate was further reduced by one percentage point to 9%. But on 16th January, 1998 Bank rate was hiked by 2 percentage points to 11% because of the significant pressure on the external value of the rupee. On 18th March, 1998 Bank Rate was reduced to 10.5% and further to 10% on 2nd April, 1998. It was followed by another reduction of one percentage point to 9% on 29th April, 1998. With the variation in Bank rate, all other rates linked with the Bank rate also varied in the same direction. Term deposit rates for one year were de-linked from the Bank rate.

During the next two years, bank rate was reduced from 9% to 8% on March 2, 1999 and further to 7% with effect from April1, 2000. Consistently low prevailing inflation led the Reserve Bank to curtail the bank rate. Another objective has been to cut the cost of bank credit. But shortly thereafter the Bank rate was raised to 8% on July 21, 2000 mainly to stabilize the value of the rupee vis-à-vis US dollar.

Since the last quarter of the fiscal 2000-01 Reserve Bank of India commenced a low interest arte regime. The bank rate was cut by 0.5 percentage point to 7.5% on February 16, 2001 followed by another cut of 0.5 percentage point to 7% on March 1, 2001. These downward revisions in the Bank rate took place after a review of developments in the domestic and international financial markets. Bank rate was reduced to 6.5% with effect from October 23, 2001 followed by another cut of 0.25% in October 2002 in view of relatively lower inflation. It was further reduced to 6% w.e.f April 29, 2003.

Refinance Policy:

Section 17 of the Reserve Bank of India Act, 1934 permits the Reserve Bank to provide accommodation to commercial banks by way of re-discounting of eligible bills or as advances against approved securities. But such lending is subject to the policy formulated by the bank in this regard; banks cannot claim such facility as a matter of right. The Reserve bank of India has restricted the availability of its refinance to banks through the various methods adopted in the past.

Interim Liquidity Adjustment Facility:

Reserve Bank of India introduced Interim Liquidity Adjustment Facility (ILAF) with effect from April 1999. The features of this facility were as follows:

1) The general refinance facility was withdrawn and replaced by a Collateralized Lending Facility (CLF) up to 0.25 per cent of the fortnightly average outstanding aggregate deposits in 1997-98, which was made available for two weeks at the bank rate. An Additional Collateralized Lending Facility (ACLF) for an amount equivalent of CLF was also made available at the bank rate plus 2 percent. CLF and ACLF which were for periods beyond two weeks were subject to a penal rate of 2% for an additional two week period. There was a cooling period of two weeks thereafter, i.e. no withdrawals were permitted during this period.
2) The existing facility for export refinance at the bank rate continued.
3) For the Primary Dealers in Government securities, liquidity support against collateral of Government securities was made available at the bank rate and the amount was constant throughout the year. Each withdrawal was subject to restriction of repayment within 90 days.
4) Additional liquidity support against collateral of Government securities was also provided to Primary Dealers for periods not exceeding two weeks at a time and the interest rate was 2 per cent over the bank rate.
5) Absorption of liquidity in the market continued to be through fixed rate repos.
6) The above facilities were supplemented by Open Market Operations in Government securities and treasury bills by Reserve Bank of India.