Rediff Logo
Money
Line
Channels: Astrology | Broadband | Contests | E-cards | Money | Movies | Romance | Search | Women
Partner Channels: Auctions | Health | Home & Decor | IT Education | Jobs | Jobs | Matrimonial | Travel
Line
Home > Money > Reuters > Report
October 19, 2001
Feedback  
  Money Matters

 -  'Investment
 -  Business Headlines
 -  Corporate Headlines
 -  Business Special
 -  Columns
 -  IPO Center
 -  Message Boards
 -  Mutual Funds
 -  Personal Finance
 -  Stocks
 -  Tutorials
 -  Search rediff

    
      



 Deals for NRIs

 CALL INDIA
 Direct Service :
 29.9¢/min
 Pre-paid Cards :
 34.9¢/min


 
Reuters
 Search the Internet
         Tips
 Sites: Finance, Investment
E-Mail this report to a friend
Print this page Best Printed on  HP Laserjets

RBI monetary policy expected to be cautious

India's central bank is likely to maintain an easier monetary stance when it presents its mid-year policy review next week as the local economy slows and the global outlook dims, but few bankers see radical rate cuts.

Many bankers expect the Reserve Bank of India to announce a reduction in banks' cash reserve ratio, currently at 7.5 per cent.

They are less certain about interest rates as the RBI has so far bucked a global trend by leading central banks to cut rates to stave off recession after the suicide hijacked attacks on Washington and New York.

Some bankers expect the RBI to lower the rate on government securities repurchase agreements, or repos, which act as an effective floor for short-term interest rates such as overnight call money.

A minority does not rule out a cut in the bank rate, the benchmark used by commercial banks to price their loans, but these expectations are muted.

This year, the RBI twice cut its benchmark bank rate, by a total of 100 basis points to seven per cent, triggering reductions in prime lending rates by several commercial banks.

It also lowered CRR by 100 basis points to 7.5 per cent to make available more deposits for lending and to lower the cost of funds for banks.

RBI officials have said it will continue its easy monetary policy and have stressed its preference for softer rates.

"We are expecting at least a 50 basis point cut in CRR which will enable banks to earn higher incomes from deployment of these funds which are locked up," said Cherian Verghese, chairman and managing director of state-run Corporation Bank.

"A bank rate cut is not really required now as it will not help in boosting our income in a way a CRR cut can," he said.

Bankers say a cut in the bank rate will not help bring down prime lending rates further as deposit rates remain high. These are held up by high rates on government-run savings schemes.

Finance Minister Yashwant Sinha has already ruled out further cuts in rates on these schemes, which mainly manage retirement funds, after stiff opposition from both labour and political parties following reductions last year.

ECONOMY NEEDS STIMULUS

India badly needs stimulus for growth with the economy headed for a third straight year of lower growth, no signs of revival in domestic demand, falling exports and a services sector growing at its slowest pace in eight years.

Other factors also support a rate cut argument -- inflation is benign and below the country's long term average, the currency has been relatively stable this year barring brief spells of volatility and a global trend of lower rates gives leeway for the RBI to cut rates without disturbing foreign capital flows.

But analysts say an economic recovery requires more than what the RBI can provide on its own.

"Interest rates have been benign for quite sometime now, what we now need is some sort of fiscal stimulus to revive demand in the economy," said Neeraj Gambhir, a senior official at leading financial services firm ICICI Ltd.

"I do not expect a bank rate cut, but the central bank may lower CRR. I also expect the current external uncertainties to keep the central bank from lowering the bank rate," he said.

Analysts note that the Indian economy is not particularly responsive to rate cuts -- prime rates of leading banks are at 11.25-11.50 per cent compared to 12.0-12.5 per cent two years ago. Yet, GDP growth slowed to 5.2 per cent in the year ended March from 6.4 per cent the previous year.

The RBI is expected to continue with measures to deepen the debt market and improve trading practises.

A few bankers expect it to delink the export refinance rate from the bank rate to help banks to move towards lower interest rates on export credit.

Accounting norms for banks are expected to be brought closer to international standards, with the treatment for bad loans tightened further.

YOU MAY ALSO WANT TO READ:
Jalan may surprise markets this time, feel bankers
Indian debt market sees few new measures in RBI policy

Back to top
(c) Copyright 2000 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Tell us what you think of this report

ADVERTISEMENT