RBI slashes bank rate, CRR

Taking a cue, commercial banks are likely to reduce the prime lending rate (PLR) by at least 50 basis points and reduce their deposit rates across all maturity slabs. “This is signalling a softer interest rate scenario, it is very clear,” said G G Vaidya, chairman, State Bank of India, the largest bank in India. Vaidya said a decision on the SBI’s deposit and lending rates could be taken only after a meeting with its internal committee on assets and liabilities.

RBI Governor Bimal Jalan said he hoped commercial banks will start cutting their rates soon. “I should expect so. Hopefully it will be soon,” Jalan told reporters when asked whether banks will start cutting rates. The RBI uses bank rate, CRR and repo rate to bring the interest rates at the desired levels.

The government was also keen for a reduction in interest rates to spur the economic growth. Sinha and Commerce Minister Murasoli Maran had gone on record recently, arguing for a cut in interest rates. Various industry chambers were also lobbying for a reduction in rates. Enabling conditions for a rate cut, like lower inflation and a stable rupee, have prevailed for months and industry had all along clamoured for such a move. The government too was eager for a rate cut because the country’s fiscal deficit at 5.6 per cent of gross domestic product meant large state borrowings in the market.

Bankers view the RBI move as the central bank’s way of reciprocating Yashwant Sinha’s politically sensitive decision to cut the interest rates on public provident fund (PPF) and other small savings in January and GPF in February. The last time the RBI cut the bank rate was in March last year. Within 24 hours of the announcement of the budget, the central bank cut the bank rate by one percentage point to eight per cent and CRR by a half a percentage point (50 basis points) to 10.5 per cent.

Subsequently, the RBI cut the CRR by another half a percentage point to 10 per cent and finally to nine per cent in October last year. However, the banks refused to respond to the RBI signal and left their lending rates untouched. RBI Governor Bimal Jalan did not force the banks to cut their lending rates against the backdrop of a relatively high interest rates on the savings instruments offered by the Central Government.

By slashing the PPF, GPF and other small savings rates the finance ministry created the backdrop of a low interest regime. Sinha also brought down the cost of borrowing for corporates by abolishing the interest tax. The cut in bank rate and CRR in the beginning of the new financial year will also ensure that the large borrowing programme of the government, which has gone up to Rs 1,12,275 crore in 2000-01 from Rs 1,08,898 crore in the current financial year.

Jalan said the rate cut would boost the economy. “We took a review of what was happening in the credit markets and decided this was the right time and it is good for the economy. We have cut all the rates that the RBI fixes. So we would like to see a lower interest rate environment for the economy. It is a good way to begin the year,” the RBI Governor said.

The cut in savings deposit rates to four per cent from 4.5 per cent will help commercial banks to offset the loss in profits due to the reduction in lending rates. Currently, the RBI regulates only the savings deposit rates while term deposit rates are determined by commercial banks.