RBI cuts rates to induce Rs 85,000 cr; signals interest cut

Mumbai, Nov 1 (PTI) In a major move to inject an
additional estimated Rs 85,000 crore into the system, Reserve
Bank of India (R.B.I.) Saturday cut key deposit requirements
for banks by 1 percent and its short-term lending rate by 0.5
percent, a decision that may help soften general interest
rates.

The decisions to cut the Cash Reserve Ratio (C.R.R.) and
Statutory Liquidity Ratio by one percent each and Repo Rate by
0.50 percent come a week after the busy season credit policy
review by R.B.I. in which it had given an assurance of more
measures to boost economic growth.

"Global financial conditions continue to remain uncertain
and unsettled and early signs of a global recession are
becoming evident. These developments are being reflected in
sharp declines in stock markets across the world and
heightened volatility in currency movement.

"International money markets are yet to regain calm and
confidence and return to normal functioning," a statement from
the Bank said, announcing the decisions, while adding it will
continue to closely monitor development in global and domestic
financial markets and take swift and effective action as
appropriate.

With Saturday's measures, the R.B.I. has pumped in about
Rs 270,000 crore in the system since October, but industry
leaders and bankers feel that more is needed to effectively
bring down the commercial lending rates.

"R.B.I. has taken welcome and concrete steps to ease the
liquidity pressures. But more is needed to see that effective
interest rates for borrowers come down by 3-4 percent," K.V.
Kamath, President of Confederation of Indian Industry
(C.I.I.), said.

Welcoming the decision, I.C.I.C.I. Bank Joint Managing
Director Chanda Kochhar said, "It will release the much-needed
liquidity into the system and signal reduction in interest
rates."

The one percentage point cut in C.R.R., the amount which
banks have to park with the apex bank, has been brought down
to 5.5 percent to infuse additional liquidity of Rs 40,000
crore into the system, the central bank said.

The C.R.R. cut will be in two tranches of 50 basis points
each. While the first one will be effective retrospectively
from October 25, the second will apply from November 8.

Last month, the R.B.I. reduced the C.R.R. by a total of
250 basis points to 6.5 percent, unlocking Rs 1,00,000 crore
into the banking system.

The repo rate, which banks pay to R.B.I. for borrowing
funds against securities, was reduced by 0.5 percent to 7.5
percent and will be effective for borrowings from the central
bank from Monday onwards.

"In view of the ebbing of upside inflation risks as
also to address concerns relating to moderating growth
momentum, it has been decided to reduce the repo rate under
the Liquidity Adjustment Facility (L.A.F.) by 50 basis points
to 7.5 percent with effect from November 3, 2008," the
statement said.

R.B.I. had earlier reduced the repo rate by R.B.I. by 100
basis points to 8 percent on October 20.

As regards the S.L.R., the R.B.I. had earlier in
September announced that banks could avail additional
liquidity support under the L.A.F. to the extent of one per
cent of the deposits and seek waiver of penal interest.

R.B.I. Saturday made this arrangement permanent by
reducing the S.L.R. by one percentage point to 24 percent of
the deposits with effect from November 8. PTI SHS
PMR
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