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Fingers crossed on bank rate cut

Mumbai, Oct. 21: There’s enough money sloshing around, but Bimal Jalan is facing calls to nudge down rates and spur growth in his busy-season credit policy next week.

No one’s sure, but many are betting that the Reserve Bank (RBI) governor will clear the way for cheaper credit by announcing the much-expected bank rate cut. With that comes a bleak prediction: homes that stash away funds in ready-to-use savings accounts could see their kitty shrinking with a possible slash in rates. Analysts reckon it could be about 25 basis points.

The bank rate — a largely notional rate that is used by the central bank to signal where it wants interest rates to rest at a given point of time — is unchanged at 6.5 per cent since October 2001. “There is no compelling reason for the governor this time around either to bring down the bank rate or hold it where it is,” a senior bank official said.

In April, the RBI governor said a decision on bank rate — whether to cut it by 50 basis points — would hinge on inflation, overall liquidity and credit offtake.

Those who argue that Jalan will hold fire point to the cash hoard of banks and the reasonable growth in non-food credit witnessed in the past few weeks. The latest weekly statistical supplement issued by the central bank showed that non-food credit increased by Rs 11,518 crore to Rs 6,19,886 crore on October 4.

However, analysts say much of this rise can be attributed to retail advances, not disbursements to corporate sector, which have been sluggish. “Going by the data on industrial production and non-food credit, there is no need to bring down the bank rate,” says Sanjeet Singh, an analyst with ICICI Securities and Finance.

Those who feel Jalan will take the plunge this time with a 25 basis-point reduction say the benign inflation and the need to trigger a rate-induced economic revival — after a drought that parched vast swathes of the country — will swing the decision their way.

“There is, therefore, a need for the monetary policy to be forward-looking and a cut in the bank rate between 25 and 50 basis points looks plausible. There are concerns about further weakness in the industry due to the global economic slowdown and poor monsoons. Therefore, bringing down the bank rate will be like buying an insurance policy for the economy,” Singh said.

There are some signs that the repo rate, an instrument through which RBI absorbs liquidity, is likely to be brought down by 25 basis points to 5.50 per cent. The optimism stems from Jalan’s statement last week that the apex bank was comfortable with falling gilt yields.

A veritable hot potato for the central bank governor would be reducing rates on savings accounts with cheque facility — the only deposit it regulates. This rate, at 4 per cent, may be brought down to 3.75 per cent, though a complete deregulation seems a while away. In April’s policy, Jalan had desisted from any major changes on this front, arguing that the effective yield of 3.4 per cent is reasonable when compared with interest rates on other short-term instruments.

Some see the cut as a logical outcome of the general decline. “At a time when interest rates are ruling low and deposit rates have declined to 7 per cent from 11 per cent, there is no reason for the savings account to be maintained at 4 per cent. This is likely to be brought down by 50 basis points to one per cent,” says P. H. Ravikumar, senior general manager of ICICI Bank.

Others, like former Bank of Baroda chairman K. Kannan, do not buy that line of reasoning, saying the RBI governor would prefer not to disillusion households who hold close to four-fifths of such saving deposits.

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