The Bank Rate has been reduced to 6.25 per cent from 6.5 per cent and the new rate is effective from the close of business on October 29, 2002. Likewise, the repos-rate under RBIs liquidity adjustment facility (LAF) has been reduced to 5.5 per cent from 5.75 per cent and the new cut-off rate will be made available on October 30, 2002.
The RBI has also announced a 25 bps reduction to 4.75 per cent, from the current level of 5 per cent. This will be effective from the fortnight beginning November 16, 2002. As per industry estimate, the CRR reduction would infuse further liquidity of around Rs 3,000 crore into the inter-bank market. On the Bank Rate reduction, Dr Jalan is categorical that the impact of a rate cut has not been percolating down and the average lending rates of banks continue to be substantially higher than the Bank Rate.
Under such circumstances, Dr Jalan ruled out any further reduction in Bank Rate if the current reduction fails to affect banks lending rates. The Bank Rate is now at its lowest level since 1973: Over the last four and a half years, the Rate has successively been reduced to the current level from 11 per cent. Though the present level of the Bank Rate as well as call money and other money market rates are quite comfortable and there is a sizeable gap between these rates and the average lending rates of banks, no useful purpose is likely to be served by a further reduction in the Bank Rate in the near future, he said.
However, the inter-bank market reacted positively to the rate cut announcements and the government securities (G-Secs) prices rose sharply across maturities. The benchmark 10-year yield at the 7.4 per cent 2012 paper was seen at its all-time low of 6.97 per cent, down from its earlier all-time low of 7.0223 per cent hit on October 18. The sharp reduction in the Bank Rate (over the period) has also been reflected in a fall in call money rates and Treasury Bill rates as well as yields on G-Secs across all maturities. In nominal terms, as well as in real terms (in relation to the prevailing rate of inflation), it is reasonable to observe that the Bank Rate, call money rates as well as yields on government securities are now quite reasonable, the RBI said.