RBI wants lower deposit rates to aid loans | india | Hindustan Times
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RBI wants lower deposit rates to aid loans

The Reserve Bank wants depositors to get less, so that borrowers can get loans cheaper. It wants public sector banks to reduce interest rates on deposits, reports Rajendra Palande.

india Updated: Oct 26, 2008 20:30 IST
Rajendra Palande

The Reserve Bank wants depositors to get less, so that borrowers can get loans cheaper. It wants public sector banks to reduce interest rates on deposits.

In a rare move, the central bank did this alongside Governor Duvvuri Subbarao’s maiden policy, with the assurance that liquidity (funds) will not be a constraint, three public sector bank executives told Hindustan Times on condition of anonymity. What this means is that the RBI would release funds from its own system.

Subbarao addressed chiefs of state-owned banks after Friday’s policy and seemed to be looking for a new way after banks declined to take a cue from last Monday’s one percentage point cut in the repo (repurchase) rate at which RBI lends money to banks for up to two weeks.

Banks have been complaining about deposit rates being too high, with fears that depositors may flee if rates were cut. Now, RBI is offering a cushion against that. One banker said RBI is trying to convey the impression that high interest rates are hurting industry and accentuating a slowdown.

The RBI’s best GDP growth estimate now is 7.5-8.00, down from 8.00 per cent forecast in April 2008 and July 2008, compared with 9 per cent growth in 2007-08.

Bankers said the weighted average lending rate is now well above 13 per cent compared with 12.9 per cent in March 2007. Public sector banks charge a maximum of 18 per cent, while they now offer 9 to 10.5 per cent for term deposits against 8.25 to 9.5 per cent in June.

Banks have an estimated credit-deposit ratio of 90 per cent. If it was 70 per cent, there would have been no shortage of liquidity.

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