Back on the track of the second round of rate cuts by the US Fed, taking the benchmark rate down by 50 basis points to 1% on Wednesday, bankers and economists now expect a second round of repo rate cut by the Reserve Bank of India (RBI) any time soon.
The fall in the inflation to 10.68%, first time since May, has also built up expectation about a second round of rate cuts, said economists. According to them, the second round repo rate cut may be to the tune of 50 basis points and this would prompt commercial banks to reduce their lending rates, which have remained at all-time-high levels for the last six months.
RBI earlier had slashed the repo rate by 100 basis points to 8%,first time in four years, and cash reserve ratio by 250 basis points to 6.5%, to manage liquidity and boost confidence of the markets, which was facing the ripple effects of the ongoing global financial crisis.
Earlier, when quizzed by FE on whether a Fed rate cut would lead to a similar step by the Indian central bank, RBI governor, D Subbarao had said, ?What the Fed does is a variable and there are others who gets influenced. I wouldn?t agree that we need to follow the Fed?s actions. Yes, we are linked with the global economy and if some changes impact us, we will have to take action.?
After 250 basis points of CRR cut, which added Rs 1 lakh crore to the system, the liquidity situation has improved substantially, say the bankers who have thus far refrained from reducing rates.
The bankers are basically waiting for further signals from RBI before they start reducing rates, say analysts. ?We see interest rates sliding for the moment. With this happening, deposit and lending rates will also see a slide. However, it is difficult to give a time frame at the moment, as to when rates will ease,? said M.V Nair, chairman and managing director with Union Bank of India.
?We would definitely like to adopt a wait n watch approach. Unless deposit cost comes down, there is no possibility that we can make changes in lending rates. We will look at the markets closely and then take a call on the lending rates,? said MD Mallya, chairman and managing director with Bank of Baroda.
Federal Reserve Chairman Ben Bernanke signaled that he?s ready to cut interest rates to the lowest level on record should the central bank?s actions fail to stem the deepening economic slump. Policy makers said on Wednesday that ?downside risks to growth remain? even after their half-point reduction in the main rate to 1%.
The Fed dropped a reference in its statement to threats from inflation, projecting, ?levels consistent with price stability?, in coming quarters.
The London interbank offered rate, or Libor, for three- month loans in dollars slid 23 basis points to 3.19% on Thursday, its 14th consecutive drop, according to the British Bankers? Association. The overnight dollar rate tumbled 41 basis points to 0.73%, an all-time low, the BBA said
Emerging-market stocks and currencies rallied. The South Korean won, which two days ago sank to a decade-low, jumped 14% on Thursday, the most since the currency soared 23% in December 1997.