Banks and bond dealers expect the Reserve Bank of India to slash its bank rate by 0.50 per cent and reduce repo rate by 0.25-0.50 per cent in the forthcoming busy season credit policy, going by the excess liquidity and lower yield on government papers.
"We are expecting a bank rate cut of 0.50 per cent to 5.5 per cent in the credit policy. Although bank rate has lost its relevance, it sends a signal for a softer interest regime in the economy," PNB Gilts managing director I D Singh said in New Delhi on Friday.
Top bankers also expect a similar cut in the refinance rate, at which RBI lends funds to banks, as the yield on benchmark 10-year government paper was less than 5.0 per cent.
Bankers are not sure if RBI will dare to touch the savings bank rate with elections coming up next year.
They are also apprehending a reduction in lending rate once the RBI announces the benchmark PLR, hopefully in the credit policy.
The benchmark PLR, which would be based on cost of funds, operating costs, NPAs and profit margin of a bank, is slated to make lending rates more transparent to borrowers.
Singh said the repo rate may also be cut by 0.25-0.50 per cent to 4.5 per cent.
"Credit growth has not been much as top-notch corporates are raising funds through bonds at less than bank rate," he said, referring to lower yield on bonds.
The apprehension of banks and bond dealers of a cut in bank rate comes in the wake of RBI's stance of maintaining a "softer interest rate bias."
Bankers and bond dealers said there was excess liquidity in the system due to hefty inflow of forex, which is slated to cross $100 billion by March-end 2004, from $87 billion last week.
Moreover, they said the government borrowing would be lower at Rs 25,000 crore (Rs 250 billion) in the next five months.
So, excess liquidity would be to the tune of Rs 50,000 crore (Rs 500 billion) in the coming months, they said.
For economy to grow by near 7.0 per cent, bankers say it would require a higher growth in credit flow to agriculture and industry.
This might prompt the RBI to reduce the cash reserve ratio from 4.5 per cent.
The RBI has in fact favoured a reduction in CRR over the years to the minimum stipulated 3.0 per cent to provide banks more leeway to invest their funds.
