Reserve Bank cuts key rates

AGENCIES
Posted on 2008-11-02
MUMBAI - Paving the way for easing home, car and commercial loan rates, the Reserve Bank of India on Saturday announced steps to pump in an estimated additional Rs 85,000 crore in the system by cutting deposit requirements and key rates, a move that complements the government’s steps to boost economic growth.
RBI cut the mandatory cash reserve and statutory liquidity requirement for banks by one percentage point each, besides lowering the rate at which it lends short-term funds to banks by 50 basis points, a day after the finance ministry altered duties to help the aviation and steel sectors.
The series of measures by both RBI and the government comes days ahead of the Prime Minister’s meeting with captains of Indian industry to assuage fears about economic slowdown as also liquidity crisis in the face of a global financial meltdown. Bankers, however, are opting to wait and assess the liquidity position before taking a call on lowering lending rates to commercial and retail borrowers, all of whom are crying hoarse about the sky high cost of loans - which in turn has cast a shadow on the economy.
Already, industrial production growth dropped to a meagre 1.3 per cent in August. “It is a highly welcome move by RBI ... But more steps are needed from policy makers for lowering interest rates by 3-4 per cent,” apex industry chamber CII’s president, Mr K V Kamath, who is also the head of the largest private sector lender ICICI Bank, said.
Late last evening, the finance ministry in a major breather to cash-strapped aviation industry had abolished five per cent customs duty on aviation fuel, the high prices of which were eating into the financial health many an airline. The government also scrapped export duty on certain iron and steel items in order to give relief to steel and iron industry reeling under acute pressure due to slump in demand for the alloy amid global financial recession.
Industry welcomed the RBI’s move to inject about Rs 85,000 crore liquidity in the system through cuts in its short-term lending rate as well as key deposit requirements for banks, but said more is needed for benefits to be passed on to consumers. The Punjab National Bank chairman and managing director, Mr K C Chakrabarty said, “We see single digit deposit rates soon... (we have) already announced to cut peak deposit rate to 10 per cent beginning next month.”
Welcoming the decision, ICICI Bank joint managing director, Ms Chanda Kochhar said, “It will release much needed liquidity into the system and signals reduction in rates.” However, it is early to say when it will get translated into lowering of interest rates, she added.
Despite a slew of measures taken by the central bank in the past month to infuse more liquidity into the system, retail interest rates have not been cut down by commercial banks, except for Punjab National Bank, which on Friday announced cutting its benchmark lending and deposit rates by 0.5 per cent each.
Bank of India CMD, Mr T S Narayanasami said that it would look at cutting deposit and lending rates, but it might take a month for deposit rates to come down. Private sector lender HDFC Bank, however, said that it would not reduce its PLR unless funding costs come down. Housing finance major HDFC’s vice chairman and MD, Mr Keki Mistry said, “We hope that strict measures now will reduce lending rates...(but) until and unless funding costs come down we cannot reduce the (benchmark lending rates like) PLR and sub-PLR.”