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RBI measures to induce rate cuts: Bankers

The bankers said the RBI's move to further cut reserve ratios and short term lending rate would induce banks to cut lending rates like commercial, home, auto loans as well as deposit rates, but it may take some time to materialise.

india Updated: Nov 01, 2008 18:04 IST

The Reserve Bank's move to further cut reserve ratios and short term lending rate (Repo) would induce banks to cut lending rates like commercial, home, auto loans as well as deposit rates, but it may take some time to materialise, bankers said on Saturday.

"Liquidity per se, ideally speaking or rationally speaking, should bring down the interest rates...But this will take may be a month or two because the banks which have a lot of sanctions in the pipeline, which are yet to crystallise into disbursements," Indian Bank's Association Chairman T S Narayanasami said.

RBI on Saturday announced 1 per cent cut in mandatory cash requirement for banks CRR and short-term lending rate repo by 0.5 per cent.

It also announced cut in the requirement for banks to keep proportion of their deposits in government securities SLR by 1 per cent. The 1 per cent cut in CRR and Statutory Liquidity Ratio would infuse another Rs 85,000 crore into the system over and above Rs 1,85,000 crore already injected by the RBI.

ICICI Bank Joint Manging Director Chanda Kochhar said the RBI's move will bring down interest rates.

"Second it is showing the mindset of the regulator that is continuously monitoring the situation and coming up with measures on dynamic basis. I think these are two positives," she said.

CMD of Delhi-based Punjab National Bank, which yesterday cut benchmark prime lending rate, saw single digit rate coming soon. "We see single digit deposit rates soon," PNB CMD K C Chakrabarty.

Chakrabarty had yesterday promised to cut maximum deposit rate by 0.50 per cent to 10 per cent from December one.

The PNB CMD said one percent SLR cut was needed. "This is an extraordinary time, once in a century. RBI has reduced SLR to infuse liquidity which has to be restored."

Bank of Baroda CMD MD Mallya said his bank may take a call on reducing interest rates early next week.

"But the thing is that RBI has given a very clear signal that interest rates are moving southwards. Liquidity has been injected substantially that will bring the cost down and therefore maybe we would effectively analyse the impact and take a view on that," he said.

IDBI Chairman Yogesh Agarwal said the cut in repo rate is an effort to calm down the overnight interest rates, which have actually climbed due to unrealistic issues.

Inter-bank call money rate closed at 17.50-18 per cent during the weekend.

"By using the repo rate, the RBI is signalling that the overnight rates must fall in the corridor within the reverse repo and the repo rate. This is an effort to reduce the overnight rates, to read it as a effort to signalling a lower interest regime in the middle and long term. All these are strong growth signals," he said.

However, many bankers said more liquidity has to be infused to really allow interest rates to move downwards.

Kochhar said,"I would also say the system would need some more liquidity. For the whole economic cycle to go back to active level. One will still have to see reduction in market rates. Deposit rates and lending rates have not come down. More liquidity is required for the market interest rates to come down.

Narayansami said there is a pressure on deposits, liquidity cannot solve the issue of certain banks, which are currently operating on a high credit-deposit ratio.

"They need resources in the form of deposits, so as long as they are dependent on this kind of resources support to take care of their existing sanctions to make them into disbursements. There will be a little more pressure on the deposits rates. It will take a month or two for the deposit rates to come down, the market to really react to the repo rate," Narayansami said.

However, he added, structurally the cost of banks would come down because of the CRR cut. "Therefore, there is a genuine case to look at cutting down the lending rates and the deposit rates," he said.

First Published: Nov 01, 2008 17:52 IST