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Our Bureau

Mumbai, Nov. 1 The Reserve Bank of India on Saturday cut the Repo rate, Cash Reserve Ratio and Statutory Liquidity Ratio, besides announcing a host of other measures, unlocking more than Rs 1,80,000 crore in additional funds for banks.

In cutting the key rate for the second time in less than a fortnight, RBI joins other apex banks across the world taking similar measurers to ease the liquidity crunch in their respective economies and improve the availability of credit.

RBI reduced the repo rate (the short-term rate at which RBI lends money to banks) by half a percentage point to 7.5 per cent, CRR (the portion of deposits banks will have to keep with RBI) by one percentage point to 5.5 per cent and SLR (the portion of deposits banks have to invest in government securities) by one percentage point to 24 per cent.

RBI has also decided to open a special window to provide refinance facility to banks.

Earlier, RBI had cut repo rate by one percentage point to eight per cent on October 20 and CRR by 250 basis points with effect from the fortnight beginning October 11.

The combined cuts in key rates, RBI’s most emphatic move in recent years, is expected to force banks to lower rates, step up lending, said a banking analyst.

Mr T.S. Narayanasami, Chairman, Bank of India, who heads the Indian Banks’ Association, said there is a genuine case now for banks to reduce interest rates. Chairmen of some other banks also hinted at rate cut, but only after assessing their assets-liability balance.

However, some other bankers felt they have to see a reduction in their cost of funds before cutting lending rates.

To attract deposits, banks have been offering rates up to 10.5-11 per cent on three-year deposits. It may take a month or two for banks to adjust these high deposit rates, said another banker.

Though markets were expecting a rate cut, the decision by the central bank to go the whole hog including a string of other measures to attack the liquidity crunch came as a bit of a surprise, said an analyst.

The liquidity tightness in the market was evident when the inter-bank call money rates reached as high at 21 per cent on Friday.

RBI is of the view that with inflation softening and falling below 11 per cent and with global commodity prices, including that of crude, easing, it is important to ensure that growth momentum is maintained. “It is important to ensure that credit requirements for productive purposes are adequately met so as to support the growth momentum of the economy,” RBI said in a statement.

The revision in repo will come into effect from November 3. The cut in CRR will be effected in two stages: first, retrospectively from the fortnight beginning October 25 and the next from November 8.

The one percentage point cut in CRR will release Rs 40,000 crore, which banks can use for lending. The one percentage point reduction in SLR will come into effect from November 8. This will provide additional liquidity to the extent of Rs 40,000 crore.

In addition to these measures, RBI has decided to provide a special refinance facility under which banks can avail themselves of funds up to one per cent of their net time and demand liabilities. Bank can borrow funds up to a maximum period of 90 days at the repo rate, which has now been reduced to 7.5 per cent. This additional window is expected to provide another Rs 40,000 crore.

To provide liquidity support to non-banking finance companies (NBFCs) and mutual funds, RBI has relaxed SLR requirements for banks to the extent of 1.5 per cent of their NDTL (net demand and time liabilities) on a temporary basis.

This will enable banks to borrow Rs 60,000 crore additional funds from RBI exclusively for on-lending to NBFCs and MFs.

This is in addition to the Rs 20,000 crore special facility allowed for MFs on October 15. NBFCs have also been allowed to raise foreign currency loans for a maximum period of three years.

In yet another step to provide additional liquidity facility, RBI has also decided to buy back market stabilisation bonds (MSS bonds).

These bonds were issued to suck out liquidity when the banking system was awash with funds in the wake of heavy flow of foreign funds.

To ease the shortage of dollar which put the rupee under pressure (touched a low of 50 a dollar a few days ago), RBI said it will continue to provide foreign exchange directly and through banks to corporates for their bulk forex requirements.

More Stories on : CRR & Bank Rates | Financial Policy | Interest Rates | RBI & Other Central Banks

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