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RBI lends growth a helping hand
- Across-the-board reduction in interest rates signals Jalan’s confidence in cheap-money policy

Mumbai, Oct. 29: Bimal Jalan has sloshed the money many say is needed to support a halting recovery and made sure he is not blamed for not doing enough.

Almost everything the industry expected came through when he unveiled the monetary policy today, but he held fire by not going ahead with the much-feared cut in the interest rates on banks’ saving accounts.

Leaning on his levers of monetary control, the Reserve Bank of India (RBI) left little doubt about where interest rates are headed when it slashed the bank rate by 25 basis points to 6.25 per cent, the cash-reserve ratio (CRR) by 0.25 percentage point to 4.75 per cent and the repo rate by the same margin to 5.5 per cent.

The CRR cut, to be effective from November 16, will infuse close to Rs 3,000 crore into a banking system already awash with liquidity. Other gestures are meant to prod lenders to give out money at cheaper rates.

However, the RBI’s crystal ball isn’t as bright as it was in April, when it had projected the growth rate for the current financial year at 6-6.5 per cent. That forecast was today trimmed to 5-5.5 per cent — a tall order for a drought-parched economy, but possible if the industry can turn the first shoots of a revival into full bloom.

“Some reduction in rates will help in improving the state of industrial recovery and take credit demand higher,” the RBI governor said while explaining the raft of measures in mid-term review of monetary policy.

The resonance of Jalan’s gestures was felt in Delhi, where finance minister Jaswant Singh described the policy as “progressive” one that will benefit common people. “The policy is progressive. I think it is a forward looking and appropriate credit policy,” he added. He said the anticipated loss in Kharif foodgrain output would be made up by a richer Rabi harvest. On the cut in bank rate, he said it would bring about benefits.

Much of what the central bank did today was meant to guide, rather than force, rates lower, but households have heaved a sigh of relief in what was not done — the cut in yields on money stashed away in savings accounts. That rate, at 4 per cent, will remain where it is. Jalan said the effective rate of 3.4 per cent that this works out to was ‘not particularly high’ for a class of investors who expect a degree of certainty on this front.

Today’s reduction takes the bank rate — the benchmark at which the RBI lends to commercial banks — to its lowest point since 1973. Over the past four years, it has been reduced from 11 per cent to 6.25 per cent, the steepest rate of decline since Independence.

Jalan ruled out further cuts in this rate until the end of the financial year in a remark that could signal the end of softening. He cited the large difference between call money rates and average lending rates of banks as evidence that the cost of money had not fallen as much as the central bank wanted it to for all borrowers.

The Reserve Bank governor conceded lending rates of banks continue to be substantially higher than the bank rate, but said this was largely due to ‘structural reasons’.

The cut in CRR to 4.75 per cent will take effect from the fortnight beginning November 16. This rate has been slashed 3.75 percentage points in the past two years, in line with the central bank’s goal of taking it to 3 per cent.

Banks have been told to maintain a minimum of 80 per cent of required CRR amount on a daily basis during a fortnight. Starting April next year, interest on these balances kept with RBI will be paid every month.

A beginning has also been made to remove the ceiling on rupee export credit rates. In the first phase, the cap of PLR plus 0.5 percentage point on pre-shipment credit from 180-270 days and post-shipment credit from 90-180 days will be lifted from May. Banks have been given the freedom to charge PLR or sub-PLR rates.

In the second phase to be declared later, the central bank will consider ending the rate cap on pre-shipment credit up to 180 days and post-shipment credit up to 90 days.

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