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Our Bureau

Mumbai, Oct. 20 Ahead of its monetary policy review scheduled later this week, the Reserve Bank of India on Monday slashed its key short-term interest rate – Repo rate – by one percentage point to 8 per cent, as part of its ongoing efforts to ease the pressure in the credit market.

The sharp 100 basis point cut in repo with immediate effect is seen as a clear signal to banks to reduce interest rates. The repo is the rate at which the RBI lends money to banks against the collateral of government securities.

In a statement issued today, the RBI said it has decided to reduce repo rate to alleviate the pressure in the credit market and to maintain the financial stability.

Most banks contacted said they would pass on the benefit to their customers. But whether this would mean an immediate cut in their PLR is not clear.

“We are eager to pass on the benefit to borrowers, because at the current rates the lending is not viable. But unless we see market rates falling structurally, we cannot revisit deposit and lending rates,” said Mr T.S. Narayanasami, Chairman and Managing Director, Bank of India, and Chairman, Indian Banks’ Association .

Banks need to ensure their asset-liability balance as many of them have recently hiked deposit rates, said an official with a private sector bank.

Though the market was expecting a rate cut, the 100 basis points cut at one go has come as a surprise. Also, the market was expecting the announcement only by the week-end when the RBI announces its credit policy on October 24, said a money market dealer.

Some banks such as Union Bank, Corporation Bank and Punjab National Bank have already lowered rates on new home and auto loans, especially for the festive season.

This is the first time in five years that the RBI has cut the repo rate, the last being in August 2003 by 0.5 percentage point to 6 per cent. In fact, RBI had raised short-term key rates several times in the past three years to control the rising inflation, which breached 12 per cent a few weeks ago.

The Monday rate cut follows a series of steps announced by the RBI over the past one month to ease the liquidity situation in the economy. The central bank had cut CRR by 250 basis points from the fortnight beginning October 11, releasing Rs 1,00,000 crore into the banking system and relaxed the Statutory Liquidity Ratio by 0.5 percentage point enabling banks to borrow more funds from the apex bank. The RBI had also granted a Rs 20,000 crore special liquidity facility to mutual funds to ease their redemption pressure.

Corporates and financial institutions have been looking for a rate cut. The government panel on liquidity is also understood to have argued for it.

Several central banks across the world have reduced interest rates in the wake of the credit crisis.

The RBI said it will continue to monitor the impact of global developments on Indian financial markets and on the liquidity conditions and will take appropriate action.

More Stories on : CRR & Bank Rates | RBI & Other Central Banks | Credit Market

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