The Hindu : Business : Reserve Bank cuts short-term rates by 25 basis points

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Wednesday, Apr 22, 2009
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Reserve Bank cuts short-term rates by 25 basis points

Oommen A. Ninan

Banks expected to reduce lending rates further

Task Force set up for G-20 working groups
Banks free to set up offsite ATMs

— Photo: Paul Noronha

LOW INTEREST REGIME: RBI Governor D. Subbarao along with Deputy Governor Usha Thorat on their way to announce the monetary policy in Mumbai on Tuesday.

MUMBAI: Expecting a reduction in lending and deposit rates by banks, the Reserve Bank of India on Tuesday reduced the key indicative short-term rates by 25 basis points.

“Within the policy rate adjustment already effected by the RBI, there is scope for banks to further reduce lending rates so as to ensure credit flow for all productive economic activity. We hope and expect that banks will play their part in the economic adjustment process by passing on the benefits of lower interest rates to their customers,” said RBI Governor D. Subbarao while announcing the Annual Policy 2009-10

Banks’ dilemma

“Banks have told us of the constraints they face in further downward adjustment of deposit and lending rates. Some of the banks’ apprehensions are valid and some not,” said Dr. Subbarao after meeting bankers as part of the annual policy announcement.

The RBI reduced the repo and reverse repo rates by 25 basis points to 4.75 per cent and to 3.25 per cent, respectively, with immediate effect.

The policy measures since mid-September 2008 have augmented actual or potential liquidity in the financial system by over Rs. 4.20 lakh crore. “This should assure financial markets that the RBI will continue to maintain comfortable liquidity.”

Keeping in view the global trend in commodity prices and domestic demand-supply balance, “we project WPI inflation at around 4 per cent by end-March 2010,” said Dr. Subbarao. The overarching challenge, according Dr. Subbarao, is to ensure an interest rate environment that supports revival of investment demand. Policy measures relating to interest rate include constitution of a Working Group to review the present BPLR system to make credit pricing more transparent; and payment of interest on savings bank accounts on a daily product basis with effect from April 1, 2010.

The RBI proposed to set up a Task Force with regard to the G-20 working groups; working group to implement the recommendations of the Committee on Financial Sector Assessment; and Financial Stability Unit in the RBI.

Measures relating to financial markets include: further liberalisation of the FCCBs buyback policy; extension of the relaxation on the all-in-cost ceilings for ECBs up to December 31, 2009; extension of the special refinance facility and term repo facility and increased limit for export credit refinance for banks up to March 31, 2010; introduction of STRIPS (Separate Trading of Registered Interest and Principal Securities) to aid the development of a sovereign zero-coupon yield curve; and revise the issuance structure of floating rate bonds, among others.

Policy measures relating to credit delivery mechanism and banking services include: issuing guidelines to banks on rehabilitation of sick SMEs; phased introduction of capital to risk-weighted asset ratio (CRAR) for regional rural banks (RRBs); a non-disruptive roadmap to ensure that only banks with licence operate in the co-operative space by 2012; and Setting up banking facilities at commercially unviable centres in the North-Eastern region.

The major prudential measures include allowing scheduled commercial banks (SCBs) to set up offsite ATMs without prior approval subject to reporting, lay down the norms for capital adequacy treatment of exposures of banks to central counterparties, prescribe a minimum lock-in-period and minimum retention criteria for securitising the loans, increase the maximum distance criterion for business correspondent for deeper penetration of banking services.In view of the current global financial market turmoil, it has also been decided to continue, for the time being, with the current policy and procedures governing the presence of foreign banks in India.

The measures relating to institutional developments include: Permit eligible SCBs to issue all categories of pre-paid payment instruments; and Permit eligible non-bank entities, including NBFCs, to issue semi-closed instruments.

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