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RBI Sets Stage

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The repo is the rate at which the RBI injects money into the financial system against securities. The reverse repo is the rate at which it absorbs excess cash swilling about in the system.

With the banking system now awash with liquidity, the reduction in the reverse repo rate is significant as it lowers the incentive for banks to park their surplus cash with the RBI since the money will yield lower returns. Banks will, therefore, look to lend these funds to the retail and corporate sector, which are hard pressed for money.

The RBI’s move was expected, especially after economic growth stuttered in the third quarter (October-December) to 5.3 per cent — the slowest in the past six years.

Since October last year, the RBI has been aggressively cutting both the repo and reverse repo rates in addition to the cash reserve ratio to jump start the economy. While the reverse repo came down from 6 per cent to 4 per cent in January, the repo has been slashed from 9 per cent to 5.50 per cent during the same period.

Announcing the monetary stimulus, the central bank said India’s growth trajectory had been impacted by the domino effect of the global economic downturn and the domestic cash crunch.

The RBI indicated that banks were lending less to industry over the past three months. It said that growth in non-food credit had been decelerating since December.

Non-food bank credit growth reached a peak of 29.4 per cent (Rs 5,82,344 crore) on a year-on-year basis as on October 10, 2008 compared with 23.3 per cent (Rs 3,74,054 crore) on October 12, 2007.

Subsequently, year-on-year non-food bank credit growth decelerated to 24.3 per cent as on December 19, 2008. Credit expansion during the period between October 10, 2008 and December 19, 2008 at Rs 30,889 crore was much lower than the Rs 1,05,774 crore during the corresponding period of the previous year.

“According to latest data, non-food bank credit has decelerated further to 19.7 per cent year-on-year as on February 13 compared with 22.7 per cent as on February 15, 2008 as credit expansion during the period between December 19, 2008 and February 13, 2009 at Rs 8,091 crore was sharply lower than that of Rs 86,978 crore in the corresponding period of the last year,” the RBI said.

After the cut in the benchmark rates, the critical question is whether the commercial banks will pass on the benefits to corporate and retail borrowers.

Sources say public sector banks are unlikely to trim their rates since they are ahead of the curve after the recent lending and deposit rate reductions.

Banks such as the State Bank of India are providing home loans at an interest rate of 8 per cent for one year. Union Bank of India has cut the interest rates on new car loans by 125 to 150 basis points and on home loans by 25 to 200 basis points

(Courtesy: Telegraph)

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