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RBI cuts rates, asks banks to follow

india Updated: Apr 22, 2009 02:23 IST
Rajendra Palande
Rajendra Palande
Hindustan Times
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ICICI Bank’s floating-rate loan customers will pay 50 basis points (100 basis points make 1 percentage point) less interest rate from Wednesday, as the country’s second largest bank responded to the sixth policy rate cut in as many months by the Reserve Bank of India (RBI).

In its monetary policy announcement on Tuesday, the RBI gave a harder push for banks to lower interest rates in synch with the steep lowering of policy rates. The interest rate cuts — on lending rates as well as on deposits — by ICICI Bank are expected to nudge all other banks to lower rates soon.

The RBI also presented gloomy, but unsurprising, economic growth projections. India’s GDP will grow by 6 per cent in 2009-10, it said, while lowering the past year’s projection to 6.5-6.7 per cent, from 8-8.5 per cent in April 2008 and 7.5-8 per cent in October 2008.

Lowering GDP growth projections in the middle of polls brought politics into the picture. “The RBI’s decision to cut rates by 25 basis points is too little a measure to revive the economy,” said BJP leader Yashwant Sinha. “They (government and RBI) have completely mismanaged the economy.”

Corporate heads welcomed the move but remained cautious. “The credit policy is a welcome articulation of a growth-orientated policy stance,” said Chanda Kochhar, joint managing director, ICICI Bank.

But “the slowdown is a matter of concern,” said Venu Srinivasan, president, CII. “The reduction in interest rates will help growth,” said Adi Godrej, chairman, Godrej Group.

Beginning Wednesday, asset-liability committees of banks are expected to take a call on reducing lending and deposit rates. “The RBI has given direction that lending rates should come down,” said V. Santhanaraman, executive director, Bank of Baroda.

Banks have been complaining that their cost of funds has not fallen much as their deposit rates remained higher because the interest rates on government small-saving schemes — a high 8 per cent today — act as a floor.

But RBI governor D Subbarao said judging from the experience between 2004 and 2007, deposit rates could be lower and should come down. Between mid-September and Tuesday, the RBI cut the repo rate (rate at which commercial banks borrow from it) by 425 basis points to 4.75 per cent, and the reverse repo rate (rate that the RBI offers commercial banks when they park money with it) by 275 basis points to 3.25 per cent.

Interest rates on loans are expected to fall by another 150 basis points over the next six months. (With inputs from Shekhar Iyer in Delhi)