The Hindu : RBI cuts bank rate, CRR

Online edition of India's National Newspaper
Wednesday, Oct 30, 2002

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RBI cuts bank rate, CRR

By Oommen A. Ninan

MUMBAI Oct. 29. The Reserve Bank of India today cut the bank rate by 25 basis points from 6.50 per cent to 6.25 per cent — a move that is expected to result in a further cut in the lending rates by banks. It also reduced the Cash Reserve Ratio (CRR) from 5 per cent to 4.75 per cent, thus augmenting the available lendable resources by Rs. 3000 crores more with the banks.

Ruling out any change in the bank rate in the near future, the RBI Governor, Bimal Jalan, said that "unless circumstances change, the policy bias in regard to the bank rate is to keep it stable at the present level at least until the end of the financial year.'' Announcing the mid-term review of the monetary and credit policy for 2002-03, here today, Dr. Jalan said, "as far as bank rate per se is concerned, we believe it is in real terms.''

The cut might also bring down interest rates on housing loans and consumer loans. Giving another indication of a lower interest rate regime, the RBI also cut the repo rate by 25 basis points.

The bank rate cut will be effective from the close of business of October 29 and the CRR cut will be effective from the fortnight beginning November 16. With this, the CRR has been reduced by as much as 3.75 percentage points over the past two years. "It is a directional move of a smaller order,'' Dr. Jalan said.

The RBI had been pursuing its objective of reducing CRR to the statutory minimum level of 3 per cent.

To improve flexibility for banks on fixing deposit rates further, they had been given the freedom to decide the period of reset on variable rate deposits. "The measures, apart from generating healthy competition among banks, are expected to improve the banking facilities available to depositors and make them more responsive to changes in the overall financial and inflationary environment,'' Dr. Jalan said.

The RBI Governor urged banks to review the maximum spread over prime lending rates (PLR) and reduce their interest rates wherever unreasonably high so that credit could be available to the borrowers at reasonable interest rates. In the current environment of low inflation, unreasonably wide spreads could adversely affect the overall credit portfolio of banks. "Very wide spreads provide opportunities for non-transparency,'' he said.

As regards the interest rates on deposits by co-operative banks, Regional Rural Banks (RRBs) and Local Area Banks (LABs), Dr. Jalan suggested that these institutions be encouraged not to pay any additional interest on the savings bank accounts over and above what was payable by commercial banks.

Co-operative banks were also encouraged not to pay interest on current accounts.

Reviewing the GDP growth for 2002-03, he said that it was likely to be 5 to 5.5 per cent as against the earlier projection of 6 to 6.5 per cent. There had been an improvement in the growth of non-food bank credit this year.

Apart from credit growth, various business expectation surveys pointed to a positive industrial outlook for the current year.

Food credit, however, declined on account of lower procurement and higher off-take of foodgrains.

While the deficiency in rainfall caused pressure on the prices of many commodities, Dr. Jalan said "the domestic inflation outlook still looks comfortable and the inflation rate is likely to be around 4 per cent.''

This was in line with the expectations in the annual policy statement of 2002-03, which was announced in April.

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