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Bank rate, CRR cuts on the cards

BS City Editor

The Reserve Bank of India seems to be favourably disposed towards effecting a cut in the benchmark bank rate as well as the cash reserve ratio soon.

Sources close to the RBI as well as the finance ministry confirm that the central bank may bite the bullet any day now. It is becoming obvious that the uncertainties precipitated by the September 11 terrorist attacks will hang around for quite some time now, these sources said, adding, "this requires the central bank to take a more positive view of the rate cuts."

The bank rate is currently pegged at 7 per cent and the CRR at 7.5 per cent. A majority of the world's central banks have cut the rates since the attacks.

These sources said the economy was just about gaining some momentum in the first week of September through increased government spending and promises to further pump-prime the economy in a series of high-level meetings held at the behest of the prime minister himself.

But this process seems to have been reversed now, sources said, adding that the RBI cannot indefinitely wait and watch the situation.

"It may choose to act and cut the bank rate as well as the CRR now instead of reacting to a development later," said a source.

While the corporates are closely monitoring the developments, banks have drawn up contingency plans to tide over the uncertainties.

"At this hour, the plan is to fence the bank from the impact of sudden developments. Stay liquid and don't keep open positions-we are following this simple principle," said State Bank of India chairman Janaki Ballabh.

Ever since the crisis broke out and the currency market came under attack, the RBI has announced that it would intervene in the forex market directly or indirectly to bridge the temporary demand-supply mismatches.

It also opened a window to auction select government securities to inject liquidity in the system as well as create a floor rate for the government bonds which have seen prices crashing.

The twin measures have brought in a semblance of stability in the market although the rupee is gradually slipping against the dollar and the yield of government securities is inching northwards.

The last time the RBI cut the bank rate was on March 2 when it was pared by half a percentage point. Subsequently, it effected a 25 basis points two-stage cut in its repo rate as well as a half a percentage point cut in the CRR.

In its annual report, released in the last week of August, the RBI hinted at a further reduction of the CRR. It also said that unless circumstances change unexpectedly "it should be possible to maintain the current interest rate environment and explore the possibility of some further softening in medium and long rates over time".

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