Now, RBI cuts repo rate to ease liquidity

Most bankers indicated that they may lower deposit and lending rates after the Reserve Bank of India (RBI) today signalled an end to the tight monetary policy regime by cutting the repo rate, or the rate at which it lends to banks, by 100 basis points to 8 per cent.

The reduction, the first since March 2004 and four days before the mid-term review of the annual policy Friday, is part of a series of liquidity-easing measures by the central bank to stoke investment and growth and counter the indirect impact of the global liquidity constraint in recent weeks.
 

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Although a repo rate cut was on the cards the cut was deeper than the 50 basis point expectation. Today’s announcement was effective immediately.

In an immediate response, Union Bank of India, the fifth-largest state-owned bank, cut rates 50 basis points on home loans up to Rs 30 lakh. “We expect the cost of funds to come down in the coming days in the backdrop of the various policy initiatives and that’s why we felt that we could make certain corrections in our home loan rates,” the bank’s Chairman & Managing Director M V Nair said.

Uco Bank Chairman & Managing Director SK Goyel added that the bank is awaiting cues from the credit policy before announcing an across-the-board rate cut towards the end of the month.

“This is a congenial environment to cut the prime lending rate," said a senior State Bank of India official.

"Such a small cut will not make big dent in profits. Money kept with RBI in the form of the cash reserve ratio (CRR) did not earn us any interest. The funds released through the earlier decisions to cut CRR can be deployed to earn decent returns. A lending rate cut could also avert further defaults,” the official added.

On Friday, Punjab National Bank had reduced interest rates on home, auto and education loans by 50 basis points, while Corporation Bank has announced a special discount scheme for the festival season.

The central bank’s move to ease liquidity comes against the background of moderating inflation — at 11.44 per cent against a high of 12.63 per cent in the week ending August 9 – which is expected to ease further as commodity prices fall.

The market reacted by rising only slightly after the announcement at noon before closing up just 247 points, the most sluggish performer in Asia today.

“It is a clear signal to banks to cut lending and deposit rates. Now, credit growth of 20 to 21 per cent can be sustained even next year,” said Bank of Baroda Chairman & Managing Director M D Mallya but did not indicate a timeframe for lowering interest rates.

Short-term rates will fall first, but bankers said the immediate priority will be to ensure that the cost of resources comes down. Companies that were so far negotiating high rates on bulk deposits may see an impact on their treasury income.

“Banks may cut their deposit rate first, and once the cost of funds comes down, then cut the rate on advances also. Inflation is certainly cooling. By reducing interest rates, it will be ensured investment will increase thus boosting the economy,” said Indian Overseas Bank Chairman & Managing Director S A Bhat.

“It will help to reduce (short-term) deposit rates. While card rates for term-deposits may take time for revision, I expect rates for bulk deposits to soften in the near future,” added Allahabad Bank Chairman & Managing Director K R Kamath.

“The repo rate cut is a welcome move by RBI and signals its focus on ensuring sufficient liquidity and smooth functioning of financial markets to support growth… but the impact on lending and deposit rates will have to be seen over time,” ICICI Bank Joint Managing Director Chanda Kochhar said in a statement.

For companies, the short-term borrowing rates will drop in the near future and they will be able issue short-term paper to raise funds, added IDBI Gilts managing director N S Venkatesh.

Till last week the markets were tight on liquidity as companies withdrew funds to pay the second installment of advance tax. In addition, RBI’s intervention in the foreign exchange market to check the steep depreciation of the rupee sucked out local currency resources. Oil and fertiliser companies, which have not been paid the subsidies by the government for selling products below production cost, were also heavy borrowers.

“The global financial situation continues to be uncertain and unsettled. Even as countries directly affected by the turmoil have taken aggressive action to manage the crisis, confidence and calm is yet to be fully restored in the financial markets. Due to financial integration, this uncertainty is transmitting to countries outside the epicenter of the crisis,” RBI said in a statement today.

Govt bond auction cancelled, banks lend RBI money!

Even as the Reserve Bank of India cancelled the auction of government bonds worth Rs 10,000 crore, banks kept away from borrowing through the repo window. During the two liquidity adjustment facility sessions, only five bids to raise Rs 2,800 crore were placed, compared to over Rs 55,000 crore last Monday. On the other hand, banks approached the central bank to park Rs 27,695 crore of surplus money through the two-day reverse repo.

Thanks to the RBI’s steps, liquidity has eased a little with the weighted average call rate, according to data on the Clearing Corporation of India website, at 6.80 per cent and operated in the 5-7 per cent range. Call rates touched 23 per cent on October 10.