RBI cuts CRR, bank rate by 1 p.c.

By Our Special Correspondent

MUMBAI, APRIL 1. Continuing the policy of bringing down the interest rates, the Reserve Bank of India today announced a cut in the Bank Rate from 8 to 7 per cent as at the close of business of April 1. It also reduced the savings deposit rates of scheduled commercial banks from 4.5 to 4 per cent effective from April 1.

The RBI also reduced the Cash Reserve Ratio (CRR) from 9 to 8 per cent, which will augment lendable resources of the banking system by about Rs. 7,200 crores. The CRR cut will be implemented in two stages by 0.5 percentage points each effective from the fortnights beginning April 8 and April 22. The RBI also reduced the repo (Repurchase Options) rate from 6 to 5 per cent, effective from April 3.

The RBI Governor, Dr. Bimal Jalan, said the release of the liquidity into the system was not the primary aim of the new measures but it should help banks reduce interest rates as a continuing Government policy. Asked whether he expected the banks to cut rates, Dr. Jalan answered in the affirmative and said the new measures would help the economy as a whole and ultimately ``result in lower interest rate''. ``As a consequence of the reduction in the Bank Rate, the interest rates on advances from the RBI by way of several facilities, including the export credit refinance to scheduled commercial banks and primary (urban) co- operative banks would be reduced by one percentage point,'' a RBI press release said. Other facilities where such a reduction would be affected are; Collateralised Lending Facility (CLF), Additional Collateralised Lending Facility (ACLF), liquidity support to Primary Dealers (PDs), advances to State Financial Corporations and Ways and Means Advances and Overdraft to the Central and State Governments.

Reports that a cut in the CRR was likely by the end of this week, led to the rise of Government securities prices on Friday. Long- dated securities witnessed a price appreciation of 70 to 80 paise on increased buying from banks. ``The market was expecting a cut in Bank rate and CRR and Friday's movement in Government securities prices were in anticipation of the change in rates,'' said Mr. M. R. Ramesh, Managing Director of Discount and Finance House of India (DFHI). The cut in the CRR would ease liquidity in the system and it is quite likely the government borrowing programme would start next week when the first stage of the CRR cut becomes effective, he said.

``The Government security borrowing programme is expected to begin in the first week of April, exerting further pressure on liquidity,'' said Mr. M. R. Madhavan of ICICI Securities and Finance Co Ltd. As the borrowing programme of the new fiscal year begins this week, the market was expecting a cut in the CRR. The tight liquidity condition increased the cut-off yield by 37 basis points to 9.95 per cent in the latest auction of 364-Day Treasury Bills conducted on March 22 compared to 9.58 per cent at the March 8 auction. The 0.5 per cent reduction in savings bank interest rate was also anticipated.

Timely step: Sinha

Alok Mukherjee writes from New Delhi:

Reacting to the RBI's decision, the Union Finance Minister, Mr. Yashwant Sinha, said, ``I am glad the RBI has moved comprehensively in the matter. The reduction in interest rates and the cut in CRR are both positive developments and will benefit the economy. It is a timely step.''

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