Bank Rate Slashed To 10 Per Cent

Rate on 30-day deposits cut to 8% Post-shipment rupee credit cheaper

The Reserve Bank of India (RBI) yesterday announced a 100 basis points reduction in the bank rate to 10 per cent from the earlier level of 11 per cent, effective from yesterday itself. The bank rate is the rate at which the RBI refinances eligible bills of commercial banks.

The RBI has thus signalled the continuation of a low interest rate regime, when heads of financial institutions had predicted that interest rates had bottomed out. Market observers expect this to be followed by a widespread decline in interest rates, led by a reduction in lending rates of commercial banks.

 

On a review of monetary and credit developments since the announcement of the monetary and credit policy in April 1997, the RBI has decided to reduce the bank rate, the central bank said.

Simultaneously, the RBI also announced a one percentage point reduction from 9 per cent to 8 per cent in interest rates on domestic deposits with maturities from 30 days to one year.

The central bank also effected a one percentage point cut in interest rates on post-shipment rupee export credit. Rates on non-resident external rupee deposit accounts have also been reduced to 8 per cent per annum, the central bank said. Interest rates on post-shipment export credit up to 90 days will now be not exceeding 12 per cent per annum. The rates for post-shipment export credit beyond 90 days and up to six months will be 14 per cent.

All interest rates on advances from the RBI on export credit refinance and general refinance to banks which are specifically linked to the bank rate will also be revised downwards.

While most bankers expressed a cautious welcome to the measure, some of them pointed out that it would be futile to expect an upsurge in economic activity merely because of a reduction in lending rates. Demand for credit is inelastic to lending rates, they said. The RBI can only try the instruments at its command but it cant enthuse banks to lend more, said a banker.

In the slack season credit policy for 1997-98, announced in April 1997, the RBI had emphasised the need to develop the bank rate as a reference rate. This would require rationalisation of the interest rate structure and linking of interest rates to the bank rate, the RBI had said.

Yesterdays cut marks the first time the bank rate has been revised since its reactivisation as a signalling mechanism. Some bankers were surprised since they did not expect the RBI to use this instrument for some time. They said the use of this instrument may become more frequent in future, as market conditions keep changing and the liquidity situation keeps shifting.