Subbarao hints at rate cut to ease credit crunch

Font Size

Print

Feedback

Email

Discuss

Related Articles

Green energy attracts global players'Millionaires to rise in India despite slowdown'3 banks raise non-resident deposit ratesCentre sends out 11.5% rate signal

Reserve Bank of India governor D Subbarao has suggested a sovereign guarantee for money market transactions and mutual funds in a global crisis situation, similar to the cover given to bank deposits, to sustain investors faith in financial institutions. He, however, warned against too much of financial regulation that could stifle innovation and said RBI recognises that Indian companies would need more credit from domestic banks. His comment, coming after two rounds of CRR cut by 150 basis points that released Rs 60,000 crore of liquidity into the system, could be a pointer to a repo rate cut by the regulator to encourage affordable credit. Repo is the rate at which the RBI lends funds to banks.

The governor made the comments in the international monetary & financial committee meeting of the International Monetary Fund at Washington DC. The IMF on Sunday endorsed the G-7 decision to move unitedly to unfreeze the global money markets, seized up since September 16. Agency reports said European leaders met over the weekend to forge a new set of measures to combat the credit freeze after their failure to act a week ago contributed to the worst sell-off in the regions stocks in two decades.

Subbarao said, “India, with its strong internal drivers for growth, may escape the worst consequences of the global financial crisis.”

He clearly spelt out the safety aspect of the Indian banks, saying the banks have “very limited exposure to the US mortgage market, directly or through derivatives, and to the failed and stressed financial institutions.” According to him, the only way the contagion could spread in India was through equity and forex markets, while money, debt and credit markets could be impacted indirectly. The governors comments are expected to soothe the markets when they open on Monday.

The governor said exchange-traded derivatives were superior to over-the-counter derivatives. This is because they are more transparent. “Do we need to focus on prescribing and instituting appropriate clearing & settlement practices even for OTC products?, he asked. There are two distinct groups of derivative contracts in India—OTC and exchange traded. RBI and Sebi have recently permitted exchange-traded currency futures, initially in rupee-dollar pair, and are expected to allow exchange-traded interest rate futures by December-January.