Continuing with its soft and flexible interest rate regime, Reserve Bank of India liberalised forex regulations to provide adequate liquidity in the market and brought about reforms in government securities even as the foreign exchange reserves crossed the much-coveted $100 billion mark.

RBI: News and views

Strong economic fundamentals in 2003 saw the rupee appreciate considerably against the US dollar by as much as 5.4 per cent as against 0.55 per cent last year though the central bank had been maintaining that the exchange rate was more market-determined and it did not have any specific target in mind.

The year also saw RBI register a number of firsts to its credit.

Bimal Jalan, whose tenure was extended twice, became the first RBI Governor to be nominated to Rajya Sabha while Y V Reddy, who replaced Jalan in September was the first RBI chief to be given a five-year term. Again, K J Udeshi became the first woman deputy Governor in the bank's history.

Watershed Year

Y V Reddy replaces Bimal Jalan as RBI Governor RBI's VRS attracts 3,491 employees RBI moots national micro-finance fund Norms on foreign currency accounts eased NRI status for students studying abroad  RBI allows investment by NRIs

Incidentally, both Jalan and Reddy, who was a deputy governor and moved to International Monetary Fund as India's representative, "vibed well" and were instrumental in steering India away from the Asian crisis in the late 90s.

In a move for banks to be better positioned to meet interest rate risks, RBI has been urging them to "quickly build up" investment fluctuation reserve.

The central bank, probably for the first time, expressed its concern over the "squeeze on margins" in the fast growing retail lending sector, especially the home loan portfolio, with banks reducing interest rates considerably, which now prevail between 7.5-11 per cent.

It was Jalan, under whose tenure, the working of RBI underwent certain changes, a move welcomed by the entire banking community. He was probably the first Governor who did not restrict himself to the Monetary Policy in April and mid-term review in October to take decisions on issues like revising the bank rate, cash reserve ratio and repo rate.

This was evident from the fact that the repo rate under the liquidity adjustment facility was reduced by 0.5 per cent to five per cent from March 3, much before the announcement of Monetary Policy on April 29.

Another first to RBI's credit was the introduction of "benchmark prime lending rate", modalities for which it asked the Indian Banks' Association to formulate and implement from next month. However, BPLR would not apply to certain categories, including home loans.

Another major initiative taken was to curb arbitrage (to prevent parking of funds) by capping interest rates on fresh repatriable non-resident external deposits of one to three years to one per cent above the London Inter-Bank Offered Rate. The ceiling was subsequently revised to 0.25 per cent above LIBOR.

With a view to ensure that funds of questionable origin were not funnelled into the Indian capital markets, RBI decided to derecognise overseas corporate bodies in India as an eligible "class of investors" under various routes/schemes available under extant foreign exchange management norms.

However, it said overseas entities owned by non-resident Indians would continue to enjoy all facilities available to any foreign investor, including the automatic route for foreign direct investment.

Following the Union Budget for 2003-04, RBI reduced the interest rate on domestic and ordinary non-resident savings deposits as well as savings deposits under non-resident (external) accounts schemes by 0.5 per cent to 3.5 per cent.

The month of March saw the central bank make available the automatic route of investments to Indian corporates with a proven track record for investments in overseas joint ventures or wholly owned subsidiaries even when the investment was not in the same core activity that they were engaged in.

It also removed the ceiling of $100 million for pre-payment of external commercial borrowings under the automatic route.

Further liberalising the forex norms in April, the central bank allowed Indian and resident individuals to invest in rated bonds/fixed income securities of listed eligible companies abroad, subject to certain conditions.

Overseas investors making long-term investments were also allowed to hedge their forex exposures in India, pending investment, by entering into forward sale contracts with banks in the country.

RBI reduced the bank rate and CRR by 0.25 per cent to six per cent and 4.5 per cent respectively in the annual Monetary and Credit Policy.

The bank rate has been reduced from 11 per cent to six per cent in the last five years. This is the sharpest decline since independence. On CRR, the central bank would continue to pursue its medium-term objective of reducing it to three per cent. However, RBI has kept its options open to revise CRR in both directions.

To contain the risk arising out of non-statutory liquidity ratio (non-SLR) investment portfolio of banks and financial institutions, through private placement route, RBI framed the guidelines in November for management of non-SLR investment by banks, which would come into effect from April 1, 2004.

RBI, however, in December, said investment by banks in units of mutual funds schemes where the entire corpus was invested in debt securities would be outside the purview of norms on non-SLR guidelines until December 31, 2004.

Providing more teeth to banks in recovering NPAs, RBI issued final guidelines on Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. The banks were able to seize properties of defaulters but were not permitted to dispose them, which has sort off proved a dampener to the whole scheme.

RBI began the year by providing one more opportunity to borrowers by issuing fresh guidelines for compromise settlement of chronic non-performing assets.

This was followed by advising banks in August that a NPA would now be classified in sub-standard category for a period of only 18 months from the date it was recommended as NPA, instead of the earlier norm of 24 months. Similarly, norms would apply to assets lying in sub-standard category for 18 months.

On the forex norms, RBI permitted NRIs and persons of Indian origin to repatriate up to $1million out of funds held in their non-resident ordinary accounts/sale proceeds of assets in January while allowing Indian companies to retain funds abroad raised through ADRs/GDRs for any period to meet their future foreign exchange requirements.

RBI, in December, permitted resident entities having overseas direct investments to hedge the exchange risk arising out of such investments.

It also gave NRI status to Indian students studying abroad. However, this status would not dilute the utilisation of the existing foreign exchange facilities in regard to their academic pursuits, it said.

On home loans, RBI has voiced its concern over the squeeze in margins and recently also urged banks to ensure that all documents were in place and to "not cut corners" while dispensing such loans.

Referring to the G-Secs market, the central bank has relaxed certain norms and said sale of a G-Sec, already contracted for purchase, would be permitted, provided such contract was either guaranteed by an approved counter party like Clearing Corporation of India Ltd.

The Real Time Gross Settlement was scheduled to be operationalised by January 2004 while the full system was expected to be in place by June 2004.

On money market, RBI decided that with effect from fortnight beginning December 27, 2003, non-bank participants would be allowed to lend, on an average in a reporting fortnight upto 60 per cent of their average daily lending in call/notice money market during 2000-01.

NRIs/OCBs were also allowed to book cross currency forward contracts to hedge the balances held in their FCNR(B) accounts.

Resident individuals maintaining a foreign currency account with an authorised dealer in India or a bank abroad, were permitted to obtain international credit cards issued by overseas banks and other reputed agencies.

Giving a relief to exporters, RBI allowed this community to open/hire warehouses abroad while with a view to liberalising and simplifying the procedure for import, it issued revised guidelines regarding import of goods, merchant trade and import of currency.

Coming down heavily on urban co-operative banks, the central bank prohibited them from extending loans and advances (both secured and unsecured) to their directors, relatives and firms/concerns/companies in which they are interested. UCBs were also advised not to renew or extend further such advances sanctioned prior to April 29, 2003.

All in all, the year 2003 turned out to be successful for the country's central bank, which also saw it become a net credit to the International Monetary Fund through the Reserve Tranche Position.

The record foreign exchange reserves, which crossed $100 billion, was proving a "management challenge" for RBI, though it has time and again said it was comfortable with the rise.

The record reserves also lead to the government prepaying certain high cost loans taken from ADB and World Bank.

The RBI Governor, who was India's representative on board of IMF prior to this assignment, while announcing his first mid-term review, proposed to set up five panels to improve credit flow to agriculture and small scale sector, and suggest ways to strengthen prudential framework and oversight functions.

RBI has also asked banks to set up ad-hoc committees on customer services to rationalise instructions on procedures prescribed by it.

As part of increasing integration of financial markets, RBI would also establish a special monitoring system for systemically important financial intermediaries.

This arrangement would have representatives from Securities and Exchange Board of India and Insurance Regulatory and Development Authority along with RBI and the mechanism would encompass a reporting system on financial matters of common interest to three regulators.

The year would end with RBI deputy governor Vepa Kamesam, who was instrumental in bringing about the clean note policy, retiring in December, after two extensions.