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Last stroke in rate-cut replay Bank rate, CRR cut 25 basis points

Mumbai, April 29: Borrowers were spoilt for choice today after Bimal Jalan told them they could waltz through with more money at rates not charged in years.

Down went the cash-reserve ratio (CRR) and the bank rate, both by 25 basis points each, in a reduction that will give banks Rs 3,000 crore more to lend. CRR is the fraction of deposits banks must keep with the Reserve Bank (RBI) while bank rate is a signalling device.

The bank rate stands at 6 per cent, the lowest in 32 years. The cut in CRR, which settles at 4.50 per cent, will be effective from banks’ reporting fortnight beginning June 14. This injects the extra Rs 3,000 crore for loans.

However, the Reserve Bank says the cut could be advanced if there was an unexpected change in money market liquidity over the next few weeks. The repo rate, revised after the Union Budget, stays at 5 per cent.

The central bank’s magnanimity was tempered by a resurgent inflation, which hit 6.47 per cent last week. There were clear hints that the policy could be reviewed if price pressures ratchet up and demand strengthens. The observations are seen as a toning down of the policy of easy money and a transition to stable rates.

The RBI projected economic growth at 6 per cent for the current financial year, if the Rain Gods are as benevolent as the weatherman has predicted. The rate of increase in GDP declined to 4.4 per cent in 2002-03 from 5.6 per cent in 2001-02 due to a drop in farm output.

The policy sees inflation as the lurking monster waiting to rear its head. Though an optimistic RBI said it could slide to 5-5.5 per cent this year, it has not dropped guard. “The situation needs to be watched closely. There is no room for complacency on this account.”

The central bank said it would continue with the policy of maintaining adequate liquidity with soft rates. “In case demand pressures emerge and the inflation jumps, which hopefully will not be the case, the present monetary policy stance may have to be reviewed.”

Jalan indicated there might not be a significant potential for further sizeable downward movement in interest rates due to some structural factors. These include the fixation of some food and other procurement prices, need for adjusting several administered food and other subsidies that increase the burden on current expenditure and wage structures with built-in inflation-related increases in wages.

Addressing reporters at the press conference after the presentation of the policy, Jalan said though the monetary policy was framed amid global economic slowdown, international uncertainties, rise in oil prices, circumstances in the country are quite comfortable for continuation of growth in the current year.

With prospects of a normal monsoon and expected decline in crude and edible oil prices, there is a feeling of confidence. “There is a general view of confidence and therefore the soft stance has been reiterated,” he added.

The Reserve Bank, he said, would continue with its stance of providing adequate liquidity to meet credit growth and support investment demand while keeping a vigil on the price level. “We have a stance which is not in favour of tightening of interest rates,” Jalan said even as he denied that the policy statement contained any indication towards bottoming of interest rates.

He signalled interest rates would not fall as rapidly as it did last year, when gilt yields plunged 210 basis points.

Bank rescue

Jalan said the Reserve Bank would step in to help banks ward off the kind of predicament ICICI Bank faced after rumours of its ill-health drained away its deposits.

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