It took a dramatic slide in growth to 5.3 per cent,inflation to 3.3 per cent,four consecutive months of deceleration in exports,a 2 per cent contraction in industrial output and finally a serious drop in non-food credit growth rate for the Reserve Bank of India to cut key policy rates the repo and the reverse repo by 50 points. Repo is the rate at which the RBI lends to banks,signaling them to reduce interest rates on a variety of loans from housing to auto. The reverse repo is the interest rate the central bank offers banks while sucking out liquidity. The much-awaited cut fell short of the widely expected 100 basis points reduction and incidentally was timed with the first public appearance of Prime Minister Manmohan Singh. The cut comes three days after RBI Governor Duvvuri Subbarao met Planning Commission Deputy Chairman Montek Singh Ahluwalia to discuss the macroeconomic situation ahead of the Group of 20 leaders meeting on April 2 in Mumbai. With the latest round of cuts the fifth in as many months the repo rate stands at 5 per cent and the reverse repo at 3.5 per cent. The modest cut in rates to bring the countrys slowing economy,hit by a financial crisis and a downturn in the worlds real economy came after a day the Election Commission announced polls and the model code of conduct kicked in. The RBI admitted that the meltdown impact turned out to be deeper and wider than anticipated earlier. Though some public sector and private sector banks have cut lending rates in response to the RBIs monetary policy stance,concerns over rising credit risk together with the slowing of economic activity appear to have moderated credit growth, the central bank said. Pointing to a sharp fall in credit expansion,the RBI noted that the year-on-year non-food bank credit growth decelerated to 24.3 per cent as on December 19. It has decelerated further to 19.7 per cent (y-o-y) as on February 13,2009 as compared with 22.7 per cent as on February 15,2008. The RBI continues to urge banks to monitor their loan portfolio and take early action,to prevent asset impairment down the road and safeguard the gains of the last several years in improving asset quality, it said. At the same time,banks should price risk appropriately and ensure that creditworthy enterprises continue to get funding,it said. Going forward,bankers,who anticipated a 100 basis points cut in rates following the fall in inflation rate below the four per cent level,expect interest rates to fall further. UCO Bank cut its PLR by 50 basis points to 12.5%. JM Garg,chairman and managing director,Corporation Bank said that the interest rates on both lending as well as deposits will be brought down by banks now. But I think the PLR reduction will start happening from next month and not immediately. Though inflation and WPI have fallen,there was no fall on the CPI (consumer price index) front,which is significant for the banks before they take a call on their deposit rates, he said. TY Prabhu,executive director,Union Bank of India,said it is a clear-cut indication of the softening of interest rates by the banks. Lots of amount will be going to the system through the reverse repo window and hence the banks will find it easy to take a call on their interest rates, Prabhu said. Partho Mukherjee,senior vice president (forex and treasury),Axis Bank said,Our ALCO,which is scheduled to meet soon,will take a final call on altering our interest rates. At this moment,I cannot indicate a possibility of lowering our lending rates. Since mid-September 2008,the RBI has reduced the repo rate five times from 9 per cent to 5 per cent,reduced the reverse repo rate thrice from 6 per cent to 3.5 per cent,the cash reserve ratio (CRR) four times from 9 per cent to 5 per cent of net demand and time liabilities (deposits) and the statutory liquidity ratio (SLR) from 25.0 per cent to 24 per cent of deposits.
