Credit Policy of Foreign Investment

Abstract:

The Credit Policy of Foreign Investment is formulated with the objective of encouraging the investments in various industrial units in India. The new credit policy has permitted the foreign investors to invest up to 30 percent of their capital in Treasury Bills in the Indian market.

Credit Policy of Foreign Investment in a Nutshell-

The objectives of Credit Policy of Foreign Investment include, boosting of the investments in the industrial units in India along with their end products, bringing down the inflation rate, which is a great cause for the decline in economy of the country.

Others are like, reducing the interest rates, continuing with the reforms on financial sector, and improve the availability of credits to meet the necessary requirements of industrial units in India. The main reference rates are reduced by one percent that led to a reduction of interest rates for the borrowers by the commercial banks as well. The other banks reduced the interest rates by 13 percent followed by the reduction of rates in the commercial banks. On the contrary, the Cash Reserve Ratio requirement remained static at 10 percent.

Credit Policy for Foreign Institutional Investors-

As per the new credit policy, the foreign institutional investors are allowed to invest in the Indian firms up to 30 percent of their capital in Treasury Bills. The banks are also privileged to decide upon the penalties subjected to the premature withdrawal of deposits by the investors. In January 1998, during the crisis of the Asian currency, the value of INR per dollar was Rs 40.45.

RBI Measures for Credit Policy of Foreign Investment-

The Reserve Bank of India implemented a wide range of welfare schemes, which resulted in the eradication of currency crisis in India. It stopped the fluctuating mode of the currency conversions and ensured stability in the same. RBI religiously stuck to two central points with regard to the above mentioned scheme, namely, an increase in banks' cash reserve ratio and an increase in the RBI's bank rate. After stabilizing the rupee, RBI proclaimed a decrease in its interest rate to 10 percent and also of the CRR to 10 percent. The first scheme was decided to be effective from March and the second one was supposed to be effective from the early weeks of April. The interest rate on short-term domestic deposits was exempted and various banks acquiring such lending options set a fresh rate for the same.