• PAGE ONE
• INDEX
• HOME

Surprise for banks, boost for industry

R. Ramachandran

THE RBI Governor, Dr Bimal Jalan, has brought in a surprise to the banking system when he announced cut in Cash Revenue Ratio (CRR) by 200 basis points from 7.5 per cent to 5.5 per cent and reduced the bank rate over 50 basis points. Such reduction in CR R will release liquidity of around Rs 8,000 crore to the lendable resources of the banks.

The simultaneous increase in interest payable on the CRR at the bank rate should help the banks recoup some losses they might incur as a result of bringing down the lending rates following the bank rate cut.

Even though the cut in CRR was expected, it seems that no one would have anticipated 200 basis points in two stages. There is no significant pressure on the balance of payments and the GDP was expected to grow as per the RBI's expectations, between 5-6 p er cent and the current account deficit below 2 per cent of the GDP.

As the PLR is likely to go down following the Bank rate cut, corporates across the Board will get the benefit. A bank rate cut will lower various refinance rates, bringing down the cost of funds for the banks.

A cut in interest rates has an impact on prices of financial assets, especially bonds and equities. The financial market, even if liberalised, is far from integrated with the rest of the market. Much of the financial intermediation business is dominated by Public Sector Banks/Financial Institutions and, hence, responses to changes in interest rate are not forthcoming in the equities market. It would have helped further if the RBI had relaxed the cap on the Capital Market exposure, and introduced increas ed supervision on this part of the banks' portfolio. This would have lifted the morale of the equity market.

The tightening of non-SLR investments by banks and FIs is a welcome step as it would contain risks of Public Sector Banks, and ensure transparency.

Credit offtake has indicated positive figures in September and will continue to move up in the busy festival season, as the interest rates have come down further. However, business houses, individual investors and consumers should know how to take advant age of the lower interest rate environment.

India has faced slowdowns before, but with higher interest rate regime, expanded on an average growth rate of above 5 per cent per annum. Now it is time the economy grows at least 6 per cent per annum with better corporate earnings and growth in agricult ural economy.

While most policies of the Government and the RBI try to create stimulus to the economic activities, it is yet to be seen whether corporate India and market participants will take significant advantage of the lower interest rate regime, and if these poli cies will instil the growth impulse.

(The author is President and Chief Executive Officer, TAIB Capital Corporation Limited, Bangalore.)