The weekend announcement of monetary measures came along with the unveiling of the second stimulus package by the Government to spur demand across various sectors.
With Friday’s steep cut, the repo rate, at which RBI lends funds to banks, has been reduced to 5.5 per cent from 6.5 per cent and reverse repo — the interest rates RBI offers to banks on surplus funds parked with it — to 4 per cent from 5 per cent with immediate effect.
The 0.5 percentage point reduction in CRR — the slice of deposits that banks have to maintain with RBI — from 5.5 to 5 per cent, which will release Rs 20,000 crore bank funds, will come into effect from the fortnight beginning January 17.
RBI said the measures were taken after reviewing the economic situation, which showed evidence of economic activity slowing down.
Following the RBI signal, banks are expected to further cut both lending and deposit rates. Mr T.S. Narayanasami, Chairman of Indian Banks Association and Chairman and Managing Director, Bank of India, said the RBI move is a positive signal for banks to cut rates. “There are no second thoughts on that,” he said.
The cut in CRR, in the backdrop of inflation coming down, will facilitate banks to revisit lending and deposit rates soon. “A revisit should be feasible by the first week or middle of February,” he said.
The RBI move is a clear indication that rates have to come down to create impetus for investment. Interest rate is equally important or else investment decisions could get postponed. The current lending rates should encourage corporates to borrow, said Mr M.V. Nair, Chairman and Managing Director, Union Bank of India.
Some bankers, however, said they may reduce the deposit rates first. Mr M.D. Mallya, Chairman & Managing Director, Bank of Baroda, said, “Obviously deposit rates will have to come down before lending rates are cut. At the beginning of the year, the guidance for credit offtake was 20 per cent. That guidance was based on the inflation ruling at that time. Now that inflation is down and the thrust is on growth momentum, the current guidance for credit may be around 25-26 per cent for this year.”
In a statement explaining the rationale of the rate cut RBI said “Exports registered a negative growth for the two recent consecutive months, October-November 2008, for the first time since February 2002. The index of industrial production registered a negative growth of 0.4 per cent during October 2008...Business confidence has been dented significantly. There are clear signs of deceleration in investment demand.”
With India’s growth trajectory getting impacted both by the global financial crisis and the follow-on global economic downturn, the RBI, since mid-September 2008, has cut repo rate by 350 basis points (including the latest 100 basis points cut), reverse repo by 200 basis points, and cash reserve ratio by 400 basis points.
The Government securities market gave a big thumbs-up to RBI’s monetary measures, with the yield on the benchmark 10 year G-Sec (8.24 per cent 2018 GS) thawing by 18 basis points and its price surging by Rs 1.25, post-announcement. Yield and price of a bond are inversely related. The 10-year paper rallied by Rs 1.84 to close at Rs 123.25 (yield: 5.07 per cent) as compared to the previous close of Rs 121.41 (yield: 5.29 per cent).
With the downside risks to the global economy increasing and advanced economies gearing their policy initiatives towards managing recession and defusing potentially deflationary trends, the RBI has adjusted its policy stance from demand management to arresting the moderation in growth.
The Reserve Bank asked banks to monitor their loan portfolio and take early action, including debt restructuring where warranted, to prevent the rise of bad assets down the road.
source: Business Line
