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Business
Banks' apathy to rate cut
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Though the monetary stance as pronounced in the April policy continues in the recently announced policy, the central bank has hinted at limited downward flexibility in the interest rate structure of the economy, says Ommen A. Ninan.
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EVENTHOUGH THE Reserve Bank of India (RBI) indicated a low interest rate regime by reducing the Bank Rate by 50 basis points, banks are not ready for a rate cut as interest rates are already low in their view and a cut would further undermine the profitability of banks.
``Interest rates are already quite low,'' said Mr. Janki Ballabh, Chairman, State Bank of India. During the last one year interest rate have come down by more than 200 basis points on Government securities (Gilt). ``This is the benchmark,'' he added. Most of the top corporate borrowers are able to access market and take advantage of low interest rates even without resorting to an interest rate based on prime lending rate (PLR) or even sub-PLR.
In other areas, competition is driving the market towards reduction in spreads. Today practically all banks are offering home loans at PLR which were earlier quoted at 2 per cent or more above PLR. ``The scope for further reduction in interest rates appears to be very limited and has to be seen in the context of cost of deposit, both interest cost and also transaction cost,'' Mr. Ballabh reasoned.
Recalling the annual policy statement of April 2001 on its mid-term review of Monetary and Credit Policy on October 22, the RBI Governor, Dr. Bimal Jalan, stated that the overall stance of the monetary policy of 2001-02 would be continued; an easy liquidity situation with a low interest rate regime. Thus the RBI cut the Bank Rate by 50 basis points from 7 per cent to 6.50 per cent to touch its lowest since May 1973 and reduced the cash reserve ratio (CRR) by 200 basis points in two stages from 7.50 per cent to 5.50 per cent releasing a total lendable resources of banking system by about Rs. 8,000 crores. Already, liquidity in the system is fairly comfortable. While the markets expected only a cut of 50 basis points, the intensity of CRR cut surprised the market.
In the money market, call money rates will tend to ease only after the CRR cut is effected from November 3. This is the first phase which would release Rs. 6,000 crores into the system. The second phase is effective only on December 29. It will release balance Rs. 2,000 crores. Whether the easier monetary measures would lead to higher credit offtake would depend on the economic conditions. The global economic slowdown is likely to adversely affect the domestic economy also especially due to drop in India's exports. However, Mr. Ballabh said, ``I see a perceptible pick up in demand for credit during the last couple of months and this is likely to continue during the remaining part of the current year.'' Historically, the second half of a fiscal year, which is also known as ``busy season,'' the demand for funds will pick up in a large way.
Mostly the additional funds coming to the system would help the Government more than the corporates, as the Government is likely to overshoot its borrowing requirements for the current fiscal whereas corporate demand is low as industrial growth is sluggish. Banks might be forced to park the surplus funds in Government securities driving its prices higher thereby bringing down the yields. Banks would not miss this chance. ``The bulk of the liquidity released will be invested in Government securities as banks are strengthening their treasury operations to improve profitability,'' said Mr. Siddharth Mathur, Research Head of J. P. Morgan.
Though the monetary stance as pronounced in the April policy continues, the central bank has hinted at limited downward flexibility in the interest rate structure of the economy. According to it, certain structural constraints have to be progressively removed to improve upon the flexibility of interest rates. Specifically, these pertain to general absence of variable interest rate deposits, overhang of non-performing assets in the banking sector, borrowing programme of Central Government and expectations of certain threshold nominal interest rates by savers.
In the bond market, immediately after the announcements, the long-end gilt prices jumped by 75-100 paise and moved up further after a slight correction. AT present, the ten-year benchmark Central Government security 11.50 per cent 2011 is trading around 8.95 per cent levels, 18 basis points lower than pre-announcement levels. The short-end rates have moved down more sharply, with the 364-day treasury bills trading around 25 basis points lower.
``Going forward, we expect the long-end rates to consolidate around these levels and the potential for any large and sustained movement in either direction appears limited,'' said Mr. Sanjeet Singh, Research Head, ICICI Securities.
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