Bankers Divided Over Likely Bank Rate Cut

Lower interest rates will be on the Reserve Bank of Indias agenda when it announces its credit policy next month, but bankers yesterday were divided as to whether this would entail a cut in its key bank rate.

They said a less bold step would be to leave the bank rate at 10 per cent but cut banks cash reserve ratio, which is also at 10 per cent. The RBI announces its credit and monetary policy for the second half of `97/98 (April-March) in mid-October.

Our bank is working on the basis there will be half a percentage point cut in the (RBI) bank rate, said the head of treasury at a private Indian bank. Thirteen of 24 participants in a Reuters poll released on Monday said they expected the bank rate to remain unchanged through December `97. But 11 thought the bank rate would be cut. Four of them predicted a 0.5 percentage point cut to 9.5 per cent and seven thought the rate would be 9.0 per cent by December.

 

A cut in the RBIs bank rate will be the best way to signal lower interest rates without upsetting monetary aggregates, said the treasury chief at a foreign bank in Bombay. The bank rate is the rate at which banks borrow from the Central bank. Changes in the bank rate are seen as signals from the Central bank on which way it wants interest rates to move.

The treasury head said another way to reduce interest rates would be to cut banks cash reserve ratio requirements, which would increase funds available for lending. But this will boost money supply growth...increasing inflationary pressures, the treasury chief added. The RBI has stressed targeting monetary growth as a policy priority. Data released last Saturday showed the RBI zeroing in on its target of between 15.0 per cent and 15.5 per cent growth in M3. M3 growth in the fortnight to August 29 fell to 15.8 per cent from 16.5 per cent the previous fortnight. Growth in industrial production has failed to show clear signs of picking up and this has undermined Indian stock markets, already dented by the turmoil in Southeast Asian markets.

June industrial output was up 4.2 per cent compared to last year, but this was well down from the 12.7 per cent growth seen between June `95 and June `96. They said, bankers say liquidity and credit demand do not merit a rate cut. It is low enough as it is, said a money market dealer at a Bombay bank.(Reuter)A cut in the RBIs bank rate will be the best way to signal lower interest rates without upsetting monetary aggregates, said the treasury chief of a foreign bank