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Credit Policy: Bank rate, repo rate cut likely

BS Banking Bureau in Mumbai

The Reserve Bank of India's credit policy in April 2002 announced a 50 basis points (half a percentage point) cut in the cash reserve ratio of banks, brining it down to 5 per cent, but refrained from tinkering with the benchmark bank and repo rates.

RBI governor Bimal Jalan in the policy statement made it clear that there was substantial excess liquidity in the system that was reflected in the repo amounts received, the lower yield on fixed income securities and the reduction in deposit and lending rates. Under these circumstances, on balance, he found it desirable to leave the bank rate unchanged.

He, however, added that the matter would be kept under constant review. "In case the overall liquidity and credit situation warrants, and inflation rate continues to remain low, a reduction in the bank rate up to half a percentage point will be considered by RBI as and when necessary," the policy statement said.

After the presentation of the policy, Jalan told reporters that the bank rate - pegged at 6.5 per cent - was unlikely to be cut in the next six months.

Industry feels that the wait and watch period is over and therefore expects Jalan to announce a bank rate cut next week in the coming credit policy. Bankers also feel that the repo rate, which was brought down to 5.75 per cent (from 6 per cent) on June 27, will be cut further. BS Banking Bureau in Mumbai

The Reserve Bank of India's credit policy in April 2002 announced a 50 basis points (half a percentage point) cut in the cash reserve ratio of banks, brining it down to 5 per cent, but refrained from tinkering with the benchmark bank and repo rates.

RBI governor Bimal Jalan in the policy statement made it clear that there was substantial excess liquidity in the system that was reflected in the repo amounts received, the lower yield on fixed income securities and the reduction in deposit and lending rates. Under these circumstances, on balance, he found it desirable to leave the bank rate unchanged.

He, however, added that the matter would be kept under constant review. "In case the overall liquidity and credit situation warrants, and inflation rate continues to remain low, a reduction in the bank rate up to half a percentage point will be considered by RBI as and when necessary," the policy statement said.

After the presentation of the policy, Jalan told reporters that the bank rate - pegged at 6.5 per cent - was unlikely to be cut in the next six months.

Industry feels that the wait and watch period is over and therefore expects Jalan to announce a bank rate cut next week in the coming credit policy. Bankers also feel that the repo rate, which was brought down to 5.75 per cent (from 6 per cent) on June 27, will be cut further. The margin of the cut can vary between 25 basis points and 50 basis points.

The banking community is expecting these cuts even as the liquidity overhang in the system continues, with the RBI repo window attracting an average of Rs 15,000 crore (Rs 150 billion) daily and the yield on government paper and corporate bonds falling to new lows every day. The inflation rate continues to be low and hence is not acting as a stumbling block for cuts.

The market has already factored in the cuts and hence there is unlikely to be any impact overnight. "The governor has been repeatedly saying that he is comfortable with the falling yields on gilts and it is widely expected that he will cut the bank rate as well as the repo rate. If the cuts do not come through, there will be adverse impact," said a treasury manager.

The rate cuts, if actually effected, will help banks cut their deposit as well as lending rates.

"If the banks are able to cut their deposit rates further, the prime lending rates will also go down and borrowers across the board will get the advantage of the low interest rate regime," pointed out a senior banker. So far only top rated corporate borrowers have got the benefit of low rates as banks are offering them money at sub-PLR rates (instead of bringing down their PLR).

The RBI can bring down the repo rate in isolation and leave the bank rate untouched but if it cuts the bank rate it will go hand in hand with a repo rate cut, bankers said.

The banking community is expecting these cuts even as the liquidity overhang in the system continues, with the RBI repo window attracting an average of Rs 15,000 crore (Rs 150 billion) daily and the yield on government paper and corporate bonds falling to new lows every day. The inflation rate continues to be low and hence is not acting as a stumbling block for cuts.

The market has already factored in the cuts and hence there is unlikely to be any impact overnight. "The governor has been repeatedly saying that he is comfortable with the falling yields on gilts and it is widely expected that he will cut the bank rate as well as the repo rate. If the cuts do not come through, there will be adverse impact," said a treasury manager.

The rate cuts, if actually effected, will help banks cut their deposit as well as lending rates.

"If the banks are able to cut their deposit rates further, the prime lending rates will also go down and borrowers across the board will get the advantage of the low interest rate regime," pointed out a senior banker. So far only top rated corporate borrowers have got the benefit of low rates as banks are offering them money at sub-PLR rates (instead of bringing down their PLR).

The RBI can bring down the repo rate in isolation and leave the bank rate untouched but if it cuts the bank rate it will go hand in hand with a repo rate cut, bankers said.

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