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October 22, 2001
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Most bankers expect RBI to cut CRR, bank rate

BS Banking Bureau

CREDIT
POLICY

A majority of bankers expects the Reserve Bank of India to cut banks' cash reserve ratio as well as the benchmark bank rate by half a percentage point (50 basis points) each. A few senior bankers also feel that the RBI may raise the interest rate on CRR to help banks partially compensate for the loss to be incurred on bringing down the lending rates in the aftermath of a bank rate cut.

Bankers also expect the Reserve Bank to come out with new norms for creation of a special reserve as a cushion for any adverse movements in the value of their massive investment portfolios that may be triggered by interest rate volatility.

Out of ten senior bankers contacted by the Business Standard on Sunday on their expectations from the credit policy, eight bankers said they expect a cut in CRR as well as the bank rate. Of the rest two, one banker expects only CRR cut and no bank rate cut (taking the number of banker expecting CRR cut to nine out of ten) and another feels there will not be any rate cut at all.

Given a choice, none of them wants a bank rate cut. Over the last fortnight, several bank chairmen have made it clear to both the Reserve Bank as well as the finance ministry that a bank rate cut is not warranted and it may not translate into a lending rate cut.

A 50 basis points cut in CRR -- which will release around Rs 50 billion in the system -- will bring down the level of CRR to 7 per cent. RBI had earlier effected a two-stage 25 basis points CRR cut in February and March followed by another 50 basis points cut in May.

It had cut the bank rate twice by 50 basis points each in February and March to bring it to 7 per cent. With a further 50 basis points cut, it will go down to 6.5 per cent. At least some of the banks are likely to respond to the bank rate cut by cutting down their long term prime lending rate (PLR) by 50 basis points from next month.

However, they are likely to leave the short and medium term PLR untouched. At present, State Bank of India's long term PLR is pegged at 11.5 per cent, short term 10 per cent and medium term 10.5 per cent.

A 50 basis points cut in PLR will pull down the banking industry's interest income by Rs 25 billion. This can be partially offset by a cut in CRR as the banks will be able to earn higher interest rate on Rs 50 billion that will be released into the system by cutting down CRR by 50 basis points.

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