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N. Kamakodi

The 0.25 percentage point cut in repo and reverse repo rates by the Reserve Bank of India confirm its commitment to ushering in a low interest rate regime despite the fact that huge Government borrowings might drive up the rates.

At the same time, the RBI has not rushed to make huge reductions in policy rates thereby ensuring that all the weapons in its armoury are not used at one go. Also, more steps need to be taken to spur economic growth and to meet the Government’s borrowing programme during the fiscal year 2009-10. It may be mentioned here that the RBI has forecast a conservative GDP growth of 6 per cent only for FY 09-10 while the Government has chalked out an ambitious borrowing programme for raising close to Rs 3.6 lakh crore.

Since the surplus liquidity in the system is quite high, at over Rs 1 lakh crore, the Governor has felt no need to cut the CRR from the existing 5 per cent. He has extended the special refinance facility up to 1 per cent on the SLR and special repo facilities up to March 31, 2010 to ward off any possible strains on liquidity, even under unforeseen circumstances.

Keeping an eye on large Government borrowings, the RBI has also decided to infuse Rs 1.2 lakh crore of liquidity through OMO buys and MSS unwinds. Hence, the system is assured of the RBI’s commitment to providing sufficient liquidity at all times.

The soft rate regime should also reflect the stability in treasury operations to ensure a sustained congenial environment. In this regard the RBI has decided to introduce exchange-traded interest rate futures, revision in the structuring of prices of floating rate bonds (FRB) and introduction of STRIPS in FY2010 to ensure stability in prices/yields of government bonds with no sudden surprises/reversals.

Corporates have been affected by the lower demand for products, demand for price cuts and pressure on margins. The RBI’s efforts towards stable and lower interest rates will thus come in handy, not only in the form of higher demand for products but will also add to their profits on lower expenditure on cost of funds. To enable corporates to take advantage of buyback of FCCB at the low prices prevailing in the market, the RBI has enhanced the availability for funding such buybacks through internal accruals.

The RBI has considered certain reliefs to banks for increasing the offsite ATMs without the RBI’s prior permission. The banks have for long been clamouring for such a facility to increase points of sale to customers rather than opening full-fledged branches.

Floating provisions have been created by banks over the years when they earned considerable profits with the sole intention of strengthening their balance-sheets with lower net NPAs. Issuing fresh norms on the utilisation of floating provisions is welcomed by all banks.

In short, the RBI has excelled in its various trouble-shooting exercises, be it stability in prices and interest rates, and commitment to provide stimulus to the Government’s endeavour to spur economic growth through higher borrowing and spending/investment.

More Stories on : Credit Policy | CRR & Bank Rates | Economy

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