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March 5, 2002 | 1210 IST
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RBI signals cut in repo rate by 50 basis points

BS Banking Bureau

Three days after the Budget cut the small savings interest rates by 50 basis points, the Reserve Bank of India has decided to conduct a one-day fixed rate repo at 6 per cent on Tuesday.

By doing this, the RBI has signalled a 50 basis points cut in the rate of repo auctions which is part of its daily liquidity adjustment facility. A decision to cut the rate is likely to be announced on Tuesday. The RBI conducts the fixed rate repo rarely to signal short term interest rate movements.

The RBI had last cut the repo rate on May 28 last year when it was pared by 25 basis points - from 6.75 per cent to 6.5 per cent. Since then, the repo rate has remained unchanged even though the RBI cut the bank rate in its October 2001 Credit Policy.

The central bank on Monday accepted all the four bids it received for Rs 61.50 billion at a cut-off rate of 6.50 per cent. "Since the daily repo is auction-based, the RBI has not been able to cut the rate as banks put up bids at higher rates. By conducting a special repo at 6 per cent, the RBI has left the banks with no choice but to make lower bids," said a senior banker.

Government bond prices moved up by Re 1 to Rs 2 across all maturities on the back of expectations of a 50 basis points repo rate cut. The yield of the benchmark 10-year paper dipped from 7.51 per cent to 7.28 per cent.

"The repo rate cut has become imperative to correct the distortion in the short-term yield curve. The yields on 91-day as well as 364-day treasury bills and one-year dated security are less than 6.5 per cent which is the rate of one-day repo," a source said. Till recently, the yields on up to four-year dated securities were less than 6.5 per cent.

The RBI is however expected to keep the bank rate unchanged for the time being. "It may cut the bank rate in its April credit policy or even before that but certainly not in March," sources said.

The objective is to protect the banks' bottomline. Since the interest rate on banks' cash reserve ratio with the RBI is pegged at the bank rate, banks' income from such CRR cash balances will be hit following the bank rate cut. "A 50 basis point cut in bank rate will hit the industry hard as banks earn 6.5 per cent interest on over Rs 700 billion CRR balance now.

The repo rate cut will have an impact on the earnings of the State Bank of India which is the largest player using the RBI repo window to park its excess liquidity. Besides, this will bring down the floor rate of the overnight call money market also.

The average daily repo turnover is around Rs 50 billion. This has been the trend since January this year except for the last week when banks refrained from putting huge amounts of money on the repo window in view of the interest rate uncertainties in the run up to the Budget.

RBI Governor Bimal Jalan met Finance Minister Yashwant Sinha on Monday. He told reporters that the central bank's bias towards soft interest rates will continue.

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