Bank Rate Cut To Depend On Liquidity, Credit Scenario

Mumbai, April 29: | Updated: Apr 30 2002, 05:30am hrs
The Reserve Bank of India maintained its bias towards stable and soft interest rates by cutting the cash reserve ratio (CRR) by 50 basis points but refrained from further cut in its Bank Rate. The RBI cut on CRR will be effective from June 15.

“Constraints of large government borrowings and compulsions to keep deposit rates higher may have prompted the central bank to keep the bank rate steady for the moment but the RBI also said that it would cut rates if the market situations demand of one,” said ICICI Bank’s senior vice president & chief dealer domestic treasury, Narendra Gupta.

The RBI said the matter will be kept under constant review. In case the overall liquidity and credit situation warrants, and inflation rate continues to remain low, a reduction in the Bank Rate by up to half a percentage point (50 basis points) will be considered by RBI as and when necessary.

The RBI said at present, there is substantial excess liquidity in the system which is reflected in the repo amounts received by the RBI during the past six weeks.

Bankers, however, were looking forward to a reduction in the Bank Rate and said that the example the RBI is citing for keeping the Bank Rate unchanged is not appropriate, as it is considering a position when banks had offloaded excess funds accumulated towards the fiscal end.

Banks had built up huge positions towards the year expecting the liquidity to tighten and volatility in the call rates.

“However, at least for the time being, hope of a Bank Rate cut in the near-term seems to have been put to rest by the central bank,” said Development Credit Bank’s, head-treasury, Harihar Krishnamoorthy.

The RBI in its credit policy said that on April 4, 2002, the total amount tendered by way of repos was as high as Rs 30,055 crore. On an average, amounts tendered by banks in one or three-day repos have ranged from Rs 1,565 crore to Rs 16,024 crore in the past six weeks. The repos rate is currently 6 per cent, which is below the Bank Rate of 6.5 per cent, and call money rates on several days have also been lower than the Bank Rate.

In response to the easy liquidity situation, some banks have also recently reduced their deposit rates as well as lending rates. Further, yields on fixed income securities have also come down substantially.