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Pickup in credit offtake ruled out

New Delhi, Oct. 30: The Reserve Bank of India’s (RBI) decision to cut bank rates means that the deposit and interest rates of banks are likely to head south. However, bankers and analysts feel even this will not signal a rise in credit offtake, something which the cheap money policy was slated to achieve.

“The very purpose of softening interest rates is to accelerate growth, but the critical issue is demand for funds rather than on the cost of funds,” Icra managing director P. K. Choudhury told The Telegraph, adding the anxiety remains on the lower credit offtake by financially strong corporate groups.

The RBI has slashed the bank rate—the rate at which it lends to commercial banks—by 25 basis points to 6.25 per cent, while the repo rate—the rate at which RBI borrows from banks—was reduced by the same margin to 5.5 per cent. Analysts say though this is a step towards aligning Indian lending rates with international ones, it might lead to an erosion in consumer sentiment, which could presage a pullback in spending instead of signalling an economic revival.

“What is needed is investment by the government instead of rate cuts to turn the wheel of the economy,” said Gurudas Dasgupta, CPI leader and president of General Insurance Company and Life Insurance Corporation’s Employees’ Federation.

Citibank, a wholly-owned unit of the US based Citicorp group, said the easing of credit rates signifies RBI’s strategy to boost growth by keeping the system flush with liquidity. “We will have to reduce our deposit rates by 25 to 50 basis points since the deposit base is a key contributor to the banks profit,” V. Srikanth, head interest rates and derivatives, Citibank India said. However, the state-run Oriental Bank of Commerce is of the view that the rate cut will have a positive impact on the economy and especially on state-run banks.

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