Doubts Over Bank Rate Revival

The efforts of the Reserve Bank (RBI) towards reviving the bank rate are unlikely to bear fruit in the short run.

Though bankers have welcomed reactivating the bank rate, only a change in the mindset of bank treasurers could bring about the desired effect, said bankers.

The RBI's monetary and credit policy for 1997-98 has, in fact, given its emphasis on strengthening of the money markets. In this direction, the apex bank tried to reactivate the hitherto defunct bank rate by linking the refinance facilities to this rate.

While the banks have been given greater freedom to determine the interest rates, the deposit rate for a tenure of less than one year has been linked to the bank rate, too. In fact, RBI sought to influence the entire gamut of short-term interest rates by the bank rate, by using it as a signal rate.

 

"The objective is to make the bank rate not only a reference rate but also as signal rate for indicating the liquidity position," said Janak Desai, head of trading (treasury), Standard Chartered Bank.

For instance, with the new policy in place, the calls will not go beyond 11 per cent because in such a situation the banks will avail of the general refinance

facility. RBI has allocated Rs 4,600 crore under the general refinance, an amount, according to bankers, which is sufficient enough. However, a bank which takes the general refinance route cannot use the this facility for arbitrage purpose since it is not allowed to lend in the inter-bank money market. The refinance is available for four weeks at the bank rate and it is the bank rate plus 1 per cent for the next four weeks. After this period, the banks account with RBI gets debited directly.

In the absence of an active bank rate, the suggested benchmarks were the yields on treasury bill yields. "If the bank rate does become a strong reference rate, it could be used as a benchmark for pricing corporate paper," said Aashish Pitale, I-Sec.

But this will happen only in the long-run once the Bank Rate becomes widely accepted as a reference rate.