RBI cuts bank rate by 0.5%, interest rates set to fall

RBI cuts bank rate by 0.5%, interest rates set to fall
ENS ECONOMIC BUREAU

MUMBAI, MAR 1: Taking a cue from Union Finance Minister Yashwant Sinha, the Reserve Bank of India (RBI) has slashed its bank rate by 0.5 per cent to 7.5 per cent with effect from Thursday. This is the second time in a fortnight the apex bank has announced a cut in the bank rate (the RBI's refinance rate for commercial banks), sending a strong signal for a further fall in interest rates.

Budget 2001: Full Coverage

As a fall-out, Bank of Baroda on Thursday slashed its prime lending rate by 200 basis points to 10 per cent even as it introduced tenure-linked PLRs. Others like Central Bank of India, Bank of India, Centurion Bank, Global Trust Bank and UTI Bank are to take a call soon. ICICI Ltd and IDBI are also expected to deliberate on a rate cut soon.

On February 16, RBI had reduced the bank rate from eight to 7.5 per cent while the cash reserve ratio was cut by half percentage point to eight per cent in two stages. Bankers had then expected a one per cent reduction following the one per cent cut in the Fed rate by the US Federal Reserve in two phases in January. But barring SBI and some others, not many banks had reduced their lending rates. "The interest rate cut is good for the economy. It will stimulate growth. Lower interest rates are good news for the equity markets, in particular for the banking sector," said a Mumbai-based banker.

The latest RBI move follows the Finance Minister's decision to bring down the interest rates on provident fund and other small saving schemes by 1.5 per cent to 9.5 per cent in the Union budget.

Earlier on Thursday, Sinha said in Delhi that he expected his budget would prompt the central bank to cut interest rates. "I don't think it will be right to say that the Indian economy is insulated from interest rate trends," Sinha said, adding, "I think as we face global competition increasingly, this issue is becoming more and more central for our economy."

"They are taking a very big chance. It is a big danger because inflation is rearing its head right now," said Saumitra Chaudhari, economist at ICRA Ltd. "the RBI may have to resort to monetary tightening later. Wholesale prices inflation, running over 8.5 per cent is at five-year highs, but core inflation that excludes volatile food and fuel prices is at half that level."

If the trigger for the bank rate and CRR reductions on February 16 was successive Fed rate cuts, the bank rate cut announced today was very much in response to changes in domestic environment. Read, the Union Budget for 2001-02. In his post-budget reaction, SBI chairman Janaki Ballabh had said that the bank will review its deposit rates, but with the bank rate cut today, it could well be that another PLR reduction could well be on the cards. Ballabh had stated that Union Budget will give a stimulus for credit growth, and that banks were looking at good avenues to lend funds.

Housing loans to be cheaper
MUMBAI:Housing loans for Indian customers would be cheaper by at least one per cent in the next few days. HDFC has already cut its PLR by 50 bps to 12.50 per cent effective from March 5, and will give effect to a general reduction in deposits by an equal measure from March 8.

Sources in housing finance companies (HFCs) say that they are currently busy making calculations on exact cut in interest rates. According to an official of ICICI, fast emerging as one of India's most aggressive HFC, a decision would be announced before the weekend. ``It would be between 0.5 per cent to 1 per cent for various slabs,'' he added. Income tax exemption on interest payment on housing loans upto Rs 1.5 lakh will further encourage customers to buy a house, he added.