RBI may cut bank rate, CRR

The Reserve Bank of India had slashed the bank rate, the repurchase rate (repo) as well as the cash reserve ratio (CRR) for banks by 25 basis points each (one basis point is one-hundredth of a percentage point) in its last Credit Policy in October 2002.

Will RBI Governor Bimal Jalan do an encore when he announces his eleventh Credit Policy on April 29?

The banking industry feels he will. The central bank had cut the repo rate and the savings bank rate by half a percentage point on February 28, 2002, hours after the Union Budget was presented.

Finance Minister Jaswant Singh had announced in the Budget that the small savings rate as well as the public provident fund rate were to be cut by one percentage point each.

"The rising rate of inflation is one factor which can play an important role in influencing the RBI on any decision on rate cuts. But, this may not deter Jalan from cutting the bank rate as the average inflation rate is not very high. The uncertainties over the war in Iraq are also over," said a senior banker.

The bank rate, last cut in October 2002, is now at its three-decade low of 6.25 per cent, while the CRR is at 4.75 per cent.

After the bank rate and the CRR were cut in the mid-term credit policy in October 2002, Jalan had said he would not resort to any more rate cuts during 2002-2003. He has kept his word.

Even though he cut the repo rate to 5 per cent on February 28, he left the bank rate -- the device that signals a revision of rates -- untouched.

Bankers expect a 25-50 basis points bank rate cut. This will narrow the gap between the repo rate and the bank rate.

Once the bank rate is cut, banks are expected to lower their lending rates -- a move which they have strongly been resisting for quite some time.

They did not respond to the repo rate cut in February. Over the last two years, the rates on bank deposits have fallen more sharply than the lending rates.

As a result, despite the rate cuts, banks have been able to maintain and even improve upon their net interest margins.

A bank rate cut is fairly certain as the RBI is expected to complement the finance minister's move to push growth. A cut in the CRR is also likely because the RBI needs to infuse liquidity to finance the government's huge borrowing programme in 2003-2004.

Since the huge inflow of foreign exchange has been adding to the liquidity in the system ( the RBI is buying dollars and infusing rupee liquidity ), the central bank may stagger the CRR cut.