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Monday, Nov 08, 2004

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Opinion - Letters

Interest on CRR balances

In its press release of September 11, the Reserve Bank of India (RBI) announced that, for reasons stated therein, the remuneration at the Bank Rate of eligible cash balances of banks impounded with it was no longer justifiable and that it would be delinked from the Bank Rate and placed at a rate lower than the repo rate.

Although there was no relationship indicated, the remuneration was fixed at 1 per cent point below the then prevailing repo (now renamed as "reverse repo") rate of 4.5 per cent.

In the recent Mid-Term Review of the economy, the RBI hiked the reverse repo rate by 25 basis points. With the rising demand for bank credit a shortage of liquidity is emerging.

The rate in the call money market has gone up to 6 per cent after a long time. In fairness to banks and keeping in view the opportunity cost of their funds, the RBI should consider raising the remuneration by at least 25 basis points, if not to be on a par with the reverse repo rate.

A. Seshan


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