Reserve Bank cuts key rates

In another significant move, the RBI has decided to hold back plans for liberalising the operation of foreign banks in the country in view of the current global financial meltdown.

Though credit offtake has fallen sharply (from a peak of 29.4 per cent last year to 17.5 per cent on February 27,2009) and wholsale price inflation has dipped below 1 per cent,the RBI played it safe and slashed repo rate,the rate at which the RBI lends funds to banks,from 5 per cent to 4.75 per cent and reverse repo rate (the rate that banks get for funds kept with the RBI) from 3.50 per cent to 3.25 per cent below the banks saving account of 3.50 per cent. The cut in reverse repo rate is to discourage banks from parking their surpluses with the RBI and instead lend more to the commercial sector. However,it kept the cash reserve ratio steady at 5 per cent in view of enough liquidity in the system.

RBI governor D Subbarao made it clear that there was still scope for banks to reduce their lending rates. Banks have told us of the constraints they face in further downward adjustment of deposit and lending rates. Some of the banks apprehensions are valid and some not. Within the policy rate adjustment already effected by the Reserve Bank,there is scope for banks to further reduce lending rates so as to ensure credit flow for all productive economic activity.

The RBI governor said the current deposit and lending rates were now higher than in 2004-2007,although the policy rates were now lower than in that period. Judging from the experience of 2004-07,deposit rates can be lower and should come down, he said.

On the GDP growth,the RBI said,GDP growth for 2008-09 is now projected to turn out to be in the range of 6.5-6.7 per cent. With the assumption of a normal monsoon,for policy purpose,real GDP growth for 2009-10 was placed at around 6 per cent,it said. On the prices front,the RBI said inflation was projected to remain at around 3 per cent in the medium term and 4 per cent by the end of March 2010.