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April 1, 2000


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RBI cuts bank rate, CRR, repo rates by 1%;
banks can lend Rs 72 billion more

India's central bank, the Reserve Bank of India Rediff Banking Bureau
The Reserve Bank of India, or RBI, today announced monetary easing measures to lower interest rates, which included a 1 per cent reduction in bank rate, cash reserve ratio, or CRR, and repo rates. The RBI also announced the paring of savings deposits rates of scheduled commercial banks from 4.5 per cent to 4 per cent.

The bank rate was reduced to 7 per cent from 8 per cent, effective immediately.

The cash reserve ratio was lowered from 9 per cent to 8 per cent. The central bank, in a statement, informed that the CRR cut will be implemented in two phases: the first cut of 0.5 per cent on April 8, and the second cut on April 22.

The statement also added that the "CRR cut will augment lendable resources by the banking systems as a whole by about Rs 72 billion".

Meanwhile, the repo rate will be pared from 6 per cent to 5 per cent. This cut will come in effect from Monday, April 3.

Ever since India's Finance Minister Yashwant Sinha announced a rate cut for general provident funds in his Union Budget 2000-2001, on February 29, the markets were abuzz with talk of a reduction in interest rates.

Then the government announced the paring of interest rates on public provident funds and small saving deposits in January.

Sinha, in the week following the presentation of the Budget, had said that the interest rates may be cut, but it was up to the RBI to take a decision on the issue.

The CRR was last cut in October 1999, when the RBI had announced a one per cent cut in cash reserve ratio in a phased manner.

Cash reserve ratio is the amount of cash that commercial banks must madatorily hold in reserve. The bank rate is the rate at which commercial banks borrow money from the RBI.

As a consequence of the reduction in bank rates, the interest rates on advances from the RBI by way of several facilities, including the export credit refinance to scheduled commercial banks and primary urban co-operative banks, would be reduced by 1 percentage point with immediate effect.

Other facilities where such reduction would be affected are: collateralised lending facility or CLF, additional collateralised lending facility or ACLF, liquidity support to primary dealers, advances and overdraft to the Union government and state governments.

RBI Governor Bimal Jalan Aim is to create a lower interest rate regime, says RBI Governor

The RBI Governor Bimal Jalan today said that the cut in bank rate, along with reduction in CRR, was aimed to create a regime of lower interest rate in the economy. Jalan said that he expected bank managements to cut their lending rates at least by half a percentage point on April 3.

He said that the liquidity in the market is comfortable and RBI has created a situation whereby banks can also lower their deposit rates.

All these measures are the necessary conditions to help the bank management working in a low interest regime, he added.

He also said the cuts are good for India and will enable the government to complete its market borrowing programme for fiscal 2000-01.

The government has fixed a gross borrowing target of Rs 1.17 trillion for fiscal 2000-01. Fiscal 2000-01 begins April 1.

There are no indications yet as to when the government's borrowing programme for 2000-2001 would begin.

Corporates, bankers welcome rate-cuts

The fiscal year 2000-2001 has welcomed the Indian corporate world with a big bang. They were given borrowing resources of Rs 72 billion from the banking sector following reduction of cash reserve ratio by one percentage point today.

Besides, the bank borrowers would have the bonanza of getting credit at one percentage lower interest following bank rate cut by one percentage cut to 7 per cent by the RBI.

Top executives of banks convened their close door meetings to take stock of the situation, following a series of monetary easing measures undertaken by the RBI today.

Generally, bankers and the business community welcomed the much-awaited measures of the RBI, which is expected to help fuel industrial and agricultural growth.

Although the measures were expected for the past couple of months now, they said that the action would facilitate a quick economic recovery for the country.

It has matched well with the new Exim Policy announced yesterday.

According to banking circles, today's monetary measures augur well in a economic situation where the country's foreign exchange reserves are at peak levels and the inflation rate is at a reasonably low level.

Sensing an impending case for southward journey of interest rates, many banks have already taken decision to lower their deposit rates in order to maintain a viable interest spreads in their lending portfolio.

Three public sector banks -- Dena Bank, the Oriental Bank of Commerce and the Bank of India -- have already announced a reduction in deposit rates by a range of half a percentage point to one per cent with effect from the first week of April.

The RBI further endorsed these measures today when it effected a half percentage reduction in savings deposit rate of scheduled commercial banks to four per cent effective from today.

Finance Minister Yashwant Sinha, in his address to the bankers at the annual general meeting of the Indian Banks' Association in Bombay last week, emphasised the need to bring down the cost of high interests to the Indian economy.

While he did not specify about the need of lowering the bank interest rates. He insisted the bankers bring down the transaction cost by reducing the margin of banks' deposit and lending portfolios.

Trade and business chambers welcomed the reduction of one percentage point in the CRR and bank rate. It would improve liquidity and credit availability, they said.

G P Goenka, president of the Federation of Indian Chambers of Commerce and Industry, said reduction in the bank rate by one percentage point and the phased reduction of the CRR by one percentage point would bring down the cost of money and induct greater liquidity in the system.

He hoped that banks and institutions will immediately lower the prime lending rates which can help reduce the cost of finances for the businesses. The banks should now desist their practice of parking their resources over and above the mandatory limit in the government securities.

Goenka said that the reduction in the bank rate and the other monetary easing measures have come at the right time when the economy is picking up.

The measures, he opined, would catalyze the economic recovery by way of reduction in the interest cost.

Corporates also can improve their bottomlines and can undertake expansion and modernisation works, he said.

The Confederation of Indian Industry said the announcement to cut the CRR by one percentage point in two instalments would infuse liquidity into the system by releasing Rs 72 billion, thereby providing much needed funds for business activity.

According to the CII, the RBI measures would give a further fillip to industrial growth and raise market expectations by facilitating the reduction in the prime lending rates.

The reduction in the bank rate would also positively impact export credit as the reduction would mean a reduction of one per cent in the RBI's export credit refinance to scheduled commercial banks, it pointed out.

Shekhar Bajaj, president of the Associated Chambers of Commerce and Industry, said the reduction in the CRR will improve the liquidity position and boost to the economy.

He said the finance minister's announcement in his Budget speech that cheaper finances wil be made available, has been endorsed by rbi.

He said that the competitive finances wil be available to help industry face competition vis-a-vis its counterpart abroad.

The Assocham chief said since the inflation is under control, there is a good reason for further reduction in the bank rate to 6 per cent from 7 per cent.

The All India Association of Industries or AIAI president Vijay G Kalantri said that the rate-cut will give impetus to economic growth and exports.

The reduction in CRR will augment lendable resources of the banking system by about Rs 72 billion and will bring in much needed liquidity which will enable banks to play a pro-active role in the economic and industrial growth,'' Kalantri said.

The imminent bank interest rate cuts, including reduction in export credit finance, will make exports more competitive and bring down inflation and cost of production, he added.

Additional inputs: UNI

FM calls it a timely, positive development

RBI's Credit and Monetary Policy 1999-2000


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