In a bid to stimulate demands and to motivate banks to lend more, the Reserve Bank of India (RBI on Wednesday announced another round of cut in key rates.
When the Wholesale Price Index (WPI) data reported last Thursday that India’s inflation rate has cooled down to 14-months low at 3.36%, it was expected that RBI might announce another round of cut soon to boost the growth rate.
In this move, the apex bank has announced to cut the reverse repo rate – the rate at which master bank borrows money from banks for short term period – by 50 basis point (bps) from 4% to 3.5%, while similar rate cut has been stated in repo rate – the rate at which the Central bank lends money to the banks. It has now come down from 5.5% to 5%.
This would discourage banks to park their money in Central Bank and nudge them to lend more. Moreover, this move of RBI has also indicated that there is strong scope of further rate cut as RBI has firmly signaled to boost the economy and to curb the panic impact of global meltdown and sluggishness.
“The services sector, which has been the main engine of growth during the last several years, has been slowing down. Business confidence has been dented significantly and investment demand has decelerated,” said Reserve Bank in a release.
Due to this indolence, the total flow of resources to the commercial sector from banks and non-bank sources till February 19, 2009 has contracted by almost Rs.1,00,000 crore, estimates RBI.
Citing the latest measure, RBI said, ‘it would help in global development.’
Few days before, in a review meeting, RBI had pushed the private sector banks to pass the benefits of rounds of cut to the customers and lend more, as despite four rounds of cuts; the foreign and private banks have not reduced the rate of interest on retail and corporate loans.
‘The decisions will reduce the borrowing costs of banks, who have been citing high cost of funds as a key handicap for not passing on the full benefit to customers’, said RBI.
It would further encourage banks to provide credit for productive purposes at feasible interest rates, which effect would come in few coming days, added master bank.
The banks were earlier reluctant to cut deposit and interest rate on loans as they had distributed huge amount of loans in terms of corporate, home and retail loans at sub prime level to beat their competitors and put higher deposit rates to bind the customers. But now, when the rates have come down, the banks would have to dilute their margins to pass the benefits of earlier rate cut as banks argued to RBI governor D Subbarao in the meeting. However, they have assured the governor to cut down rates as soon as possible after reviewing the situation.
The industries and corporate sectors have welcomed the decision of RBI as they can take more risk for taking loans at lower prices, which would enhance the flow of the money in the system and also accelerate the growth rate, as the market experts assume.
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