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No immediate change in monetary policy: Reddy

BS Banking Bureau

The Reserve Bank of India deputy governor, Y V Reddy, ruled out any immediate change in the central bank's monetary policy in response to the 50 basis point cut in the administered interest rates.

Reddy refused to say whether the finance ministry's decision to cut rates will force RBI to cut the repo rates and bank rates but made it clear that there will not be any change in monetary policy immediately.

"We have a variety of instruments at our disposal which we use from time to time to direct the interest rate movements. There is no change in our bias towards softer interest rates," he said.

Reddy said by withdrawing the tax exemptions on dividend income, the finance minister Yashwant Singh has removed a major distortion in the financial sector.

"The interest income was taxable while dividend income was not taxable. That created a major distortion between debt and equity markets. By withdrawing the tax exemptions on dividend, the Budget has removed an anomaly and, now, all investors will have the same advantages or disadvantages," Reddy said.

The RBI deputy governor felt the Budget has brought in much-needed interest rate flexibility by linking administered interest rates to government security yields. This has been done following the recommendations of the committee on small savings headed by Reddy.

"The RBI has been pleading for interest rate flexibility and the finance minister has responded to that. It may not be entirely correct to say that investors in the administered rate instruments will he hit. The Budget has imparted flexibility in rates. Now the yields on government securities are low and hence we see a half percentage point cut in rates. But, there is an upside too as the administered rates will go up as and when the yields go up," Reddy pointed out.

He also feels the debt market will gain both width and depth when the Public Debt Act 1949 gets replaced by government securities bill.

"We will see a series of procedural changes when that happens," he said.

Will the RBI, the merchant banker of the government, find it difficult to raise Rs 1370 billion in fiscal 2003, up from the budgeted Rs 1190 billion government borrowing programme in the current fiscal?

"We have time and again expressed our concerns about the size of the government borrowing programme and the fiscal deficit. It is our duty to manage the government borrowing programme however large it is," he said.

On being asked whether the large government borrowing programme will crowd out the private credit demand, he said the number of players in the government securities market is being increased and the burden on banks to shoulder the government borrowing is being reduced.

"On structural issues as well as monetary measures, I see a convergence of views of the ministry and the Reserve Bank of India. I distinctly see the focus on the fiscal side.

"Our intentions are quite clear: the tax net is being widened and many more areas are being brought under the service tax. The policy priority is now on reducing the fiscal deficit," Reddy said.

Does the Budget have the right kind of growth impetus?

"Yes, I think so. It has addressed both the structural as well as cyclical factors. We are seeing some signs of credit pickup. The outlook on the export front is also better," he said.

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