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RBI unveils further measures to boost credit flow

— Photo: Paul Noronha

MITIGATING SLOWDOWN: RBI Governor D. Subbarao (left) with Rakesh Mohan, Deputy Governor at a press conference in Mumbai on Saturday.

MUMBAI: Giving a clear signal to banks to cut the interest rates, the Reserve Bank of India on Saturday reduced the short-term indicative rates — the repo rate and the reverse report rate by 100 basis points each to 6.5 per cent and 5 per cent — with effect from December 8.

This is likely to result in a further cut in interest rates of housing loans and other consumer and personal loans by banks.

The repo rate is the rate at which the RBI lends money to banks and the reverse repo is the rate at which banks park their funds with the RBI.

“The cumulative impact of the measures in Saturday’s package, together with earlier measures, should be to step up demand and arrest the growth moderation. In particular, the reduction in the repo and reverse repo rates should result in a reduction in the marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms,” RBI Governor D. Subbarao said here while announcing a slew of measures to stimulate the economy.

Earlier, the RBI signalled a lowering of the interest rate structure by reducing its key policy repo rate by 150 basis points from 9 per cent as on October 19 to 7.5 per cent on November 3.

Taking the signal from the repo rate cut, the top five public sector banks have reduced their benchmark prime lending rates (BPLR) from 13.75–14 per cent as on October 1 to 13– 13.50 per cent now.

The central bank expects more banks to reduce rates following the latest measures.

“Our expectation is that banks will respond to the measures today by lowering lending and deposit rates,” the RBI Governor added.

He said there was evidence of economic activity slowing down. “Industrial activity, particularly in the manufacturing and infrastructure sectors, is decelerating.

The services sector too, which has been our prime growth engine for the last five years, is slowing, mainly in construction, transport and communication, trade, hotels and restaurants sub-sectors. For the first time in seven years, exports have declined in absolute terms in October.” Recent data indicated that the demand for bank credit was slackening despite comfortable liquidity.

Higher input costs and dampened demand had dented corporate margins while the uncertainty surrounding the crisis had affected business confidence, he added.

However he hoped that inflationary pressure was expected to soften in the months ahead.

The headline inflation, as measured by the Wholesale Price Index, had fallen sharply, and the decline had been sustained for the past four weeks, pointing to a faster than expected reduction in inflation.

“The reduction in prices of petrol and diesel announced on Friday should further ease inflationary pressures,” he said.

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