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C. Shivkumar

Bankers said that they expect at least 25 basis point reductions in the repo rate and the bank rate. The repo rate, reduced only two months ago, now stands at 4.5 per cent.

Bangalore , Oct. 9

FACED with a continuing expansion in liquidity, one more round of rate cuts by the Reserve Bank of India has now becoming imminent.

Bankers said that they expect at least 25 basis point reductions in the repo rate and the bank rate. The repo rate, reduced only two months ago, now stands at 4.5 per cent. It is at this rate that the Reserve Bank mops up liquidity from the market through one-day or three-day auctions during weekends.

Bankers said that during the last two weeks this rate has been under pressure. This was evident from the cut off yields for the 91-day treasury bills and the 364-day t-bills. Both these rates are currently ruling below the present repo rate of 4.5 per cent. In the last auction of t-bill, the cut off yields were 4.46 per cent. Besides at the daily and the weekend repo auctions, the RBI has been mopping up over Rs 20,000 crore. These repo auctions are part of the open market operations.

Bankers said that despite this mopping up, rates have been softening, evident from the falling 10-year yields. Ten-year yields are now in the region of about 5.07 per cent, induced by continuing expansion in foreign exchange reserves. Reserves are currently over $88 billion. RBI has continuously intervened in the markets to prevent any sharp appreciation in the rupee. The interventions have been both in the spot and in the forward markets. These interventions in the foreign exchange markets have pushed in rupee liquidity, which in turn is mopped up through open market operations. Besides the borrowing requirements for the Government for the second half are also unlikely to be substantial, despite the lower disinvestment receipts, bankers said. This is partly because tax receipts this year have remained buoyant.

But bankers also said that faced with limited flexibility in open market operations, export refinance window was also likely to be reopened in the busy season credit policy. This refinance window was shut some time ago in bid. This refinance window would allow banks to advance cheap credit to exporters and at the same time be in a position to obtain interest refinance from the central bank.

Bankers said that such a mechanism would be necessary to protect some of the small exporters, who currently have no access to cheap PSFC credit (Post-shipment/Pre-shipment credit in foreign currency). Currently, rupee credit both post-shipment and pre-shipment is available at 2.5 per cent below the prime lending rate, which ranges between 10.5 per cent and 11.25 per cent. Accordingly, rupee export credit is available only at around 8 per cent plus for the small exporters.

Consequently, bankers expect a rupee credit window to be opened to provide rupee credits to these exporters at low rate. The RBI is expected to refinance the commercial bank the difference in interest rates.

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