The Hindu Business Line : RBI cuts repo rates

Mumbai, April 21 The Reserve Bank of India on Tuesday cut key policy rates – repo and reverse repo – by 25 basis points each in order to push banks to lend more at viable rates and prop up the sagging economy.

The underlying message from the banking regulator’s rate action was clear – banks should follow suit by reducing their lending and deposit rates in order ‘to support the return of the economy to a higher growth path’.

The RBI, in its Annual Policy for 2009-10, reduced the reverse repo rate – the interest rate RBI pays to banks on the funds deployed with it – to 3.25 per cent (lower than the savings bank rate of 3.50 per cent) and the repo rate – the interest rate that banks pay on funds borrowed from RBI – to 4.75 per cent.

Since September 2008, the central bank has cut the repo rate and reverse repo rate by 425 basis points and 275 basis points respectively to preserve financial stability and arrest moderation in growth.

RBI kept all other rates unchanged.

“Given the cost plus pricing structure, banks have been slow in reducing their lending rates citing high cost of deposits. The current deposit and lending rates are higher than in 2004-07, although the policy rates are now lower… There is room for downward adjustment in deposit and lending rates,” said the RBI Governor, Dr Duvvuri Subbarao.

Responding to the rate cut, ICICI Bank, India’s largest private bank, announced a 50 basis points cut in its benchmark advance rate to 16.25 per cent (which is still high compared to public sector banks’ BPLR of 11.50 to 13.50 per cent) and deposit rates by 25 to 50 basis points with effect April 24, 2009.

Leading public sector banks such as SBI, Bank of Baroda, Canara Bank and Indian Bank, said they would take a decision soon. Between October 2008 and April 2009, public sector banks have cut deposit rates by 125-250 basis points and lending rates by 125-225 basis points.

Pointing out that the GDP growth for 2009-10 would be around 6 per cent, the central bank said any upturn in the growth momentum is unlikely in view of the projected contraction in global demand during 2009. It has projected the wholesale price index based inflation at around 4 per cent by March-end 2010.

Deposits of scheduled commercial banks, according to RBI, are projected to grow by 18 per cent and adjusted non-food credit (including investments in bonds/debentures/shares of PSUs, private corporate sector and commercial papers), is placed at 20 per cent.

Referring to the large net budgeted Government (Central + State) borrowing programme of Rs 4,34,647 crore in 2009-10, Dr Subbarao said managing the borrowing programme in a non-disruptive manner presented a major challenge.

“The RBI would continue to use a combination of monetary and debt management tools to ensure successful completion of the Government borrowings in a smooth manner, leaving adequate resources with banks to expand credit,” he said.

Pointing out that the Benchmark Prime Lending Rate (BPLR), over time, has lost its relevance as a meaningful reference rate, the Governor explained that this rate impedes the smooth transmission of monetary signals and makes the loan pricing system non-transparent. Hence, the RBI will constitute a Working Group to review the present BPLR system and suggest changes to make credit pricing more transparent.

Come April 1, 2010, payment of interest on savings bank accounts by scheduled commercial banks would be calculated on a daily product basis. Hence, interest rate calculation would be biased in favour of the depositor.

At present, interest on savings bank accounts is calculated on the minimum balances held in the accounts during the period from the 10th day to the last day of each calendar month.

The RBI has put the review of ‘Roadmap for the presence of foreign banks in India’ on the backburner in view of the current global financial market turmoil.

“There are uncertainties surrounding the financial strength of banks around the world. Further, the regulatory and supervisory policies at national and international levels are under review. In view of this, it is considered advisable, for the time being, to continue with the current policy and procedures governing the presence of foreign banks in India,” said the Governor.

Pointing out that some banks were securitising loans immediately after originating or purchasing these from other banks and some were also dividing the total loan for one project into different tranches and securitising a few tranches even before the total disbursement is complete, thus passing on the project implementation risk also to the investors, the RBI said it would prescribe a minimum lock-in-period and minimum retention criteria for securitising the loans originated and purchased by banks.

The central bank enhanced the Rs 20 lakh cap on grant loans of loans by Authorised Dealer Category–I and authorised banks against the security of funds held in NR(E)RA and FCNR(B) deposits to Rs 1 crore with immediate effect. This measure is expected to encourage overseas Indians to invest in India, be it in equity, property, etc.

The RBI extended the tenure of sector-specific facilities – special refinance facility and special term repo facility – till March 31, 2010 to provide comfort to the market. It also extended the relaxation in the all-in-cost ceilings for external commercial borrowings until December 31, 2009.

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