Jan 2, 2009|
RBI tuning in to FM
In response to the government's call for easing interest rates and providing more liquidity to productive sectors, the Reserve Bank of India (RBI) has once again used its tools of monetary policy to lower cost of funds.
It has now reduced:
Repo rate (at which it lends to banks) from 6.5% to 5.5%);
Reverse repo rate (at which it borrows from banks) from 5.0% to 4.0%; and
Cash reserve ratio (CRR) from 5.5% to 5.0%.
These moves come at a time when the central bank has barely managed to convince bankers to pass on the rate cuts to customers.
The RBI seems to be worried about the official recognition of recession in the developed economies of the US, UK, Euro area and Japan. The heightened downside risk to the global economy is what concerns it. Along with this, the policy initiatives in the advanced economies geared towards managing the potentially deflationary trends, particularly the US Fed's move of bring interest rates to near–zero seems to have influenced the RBI decision to loosen its fists.
In a tone of assurance, the RBI has also stated in its policy announcement that the cumulative amount of funds made available to the financial system through various measures are over Rs 3,000 bn. This sizeable easing has ensured a comfortable liquidity position since mid-November. Going forward, the further reduction in CRR is expected to inject additional liquidity to the tune of Rs 200 bn.
Also, taking cues from the reduction in benchmark interest rates (repo and reverse repo), all public sector banks and several private sector and foreign banks have reduced their benchmark prime lending rates (BPLRs). Notably, the top five public sector banks have reduced their BPLRs by nearly 1.5% (from a range of 13.75%-14.0% in October to a range of 12.0%-12.5% currently). These rates may come down further in response to the RBI's latest move.
More importantly, the central bank has urged bankers to monitor their loan portfolio and take early action, including debt restructuring where warranted, to prevent the rise of bad assets down the road and safeguard the gains of the last several years in improving asset quality.
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