RBI cuts rates

The Reserve Bank of India cut key rates by 25 basis points, sending out a strong signal to banks to follow suit. After announcing a cut in the repo rate—the rate at which the RBI lends shortterm funds to banks, and reverse repo rate—the rate at which banks can park surplus funds with the RBI—by 25 basis points each (1 percentage point is equal to 100 basis points), RBI governor D Subbarao said, “The further policy rate cuts effected as part of this policy should be a definitive signal for reducing lending rates.’’ He added that given the low rate of inflation, there was a need to reduce interest rates. According to the RBI’s calculation, the prime lending rates of banks should be cut by at least two percentage points to 10% from the current level of 12% (for public sector banks), he said. ICICI Bank responded by cutting its floating reference rate and benchmark prime lending rate by 50 basis points each to 13.25% and 16.25% respectively. Interest rates on all floating rate home loans of existing borrowers will also come down by the same amount. Another private sector bank, Yes Bank, also cut its PLR by 50 basis points. This is the seventh time the RBI has cut rates since the global financial turmoil erupted in September 2008. In this period, RBI has cut the repo rate from 9% to 4.75% and the reverse repo rate from 6% to 3.25%. Besides, the RBI has also taken a number of measures to infuse liquidity into the banking system. RBI governor Subbarao said the apex bank had so far injected Rs 4,20,000 crore into the system since October 2008 and would continue to maintain comfortable liquidity.Bankers are circumspect about the rigidity of the interest structure. They have expressed apprehensions about huge government borrowings, which could push the demand for funds and drive up lending rates. At the same time, on the cost of funds, bankers have also noted their inability to cut deposits rates below the small savings rates, like post office deposits at 8%. Bankers said that unless the deposit rates were brought down, lending rates could not be cut.