‘Fresh monetary steps will soften interest rates’

November 1st, 2008 - 9:12 pm ICT by IANS  

Bangalore, Nov 1 (IANS) Interest rates will soften in the coming weeks and liquidity will improve in the banking system following sudden cuts in key rates by the Reserve Bank of India (RBI) Saturday, a leading banking consultant said.”In the current scenario, maintaining stability of the financial market should be the top priority. In this context, the latest monetary measures can be viewed as the RBI’s big bang strategy to have a positive impact on the banking system and the financial markets,” World Bank consultant and former Corporation Bank chairman B.R. Ramamurthy told IANS here.

In a dramatic weekend decision earlier Saturday, the RBI reduced the repo rate by 50 basis points to 7.5 percent, the cash reserve ratio (CRR) by 100 basis points to 5.5 percent and the statutory liquidity ratio (SLR) by 100 basis points to 24 percent.

Repo rate is the interest charged by the central bank on borrowings by commercial banks, CRR is the minimum cash banks have to keep with the RBI, while SLR is the amount banks have to maintain as government securities.

“The reduction in repo rate, CRR and SLR will generate high level of confidence in the industry, as productive credit will be available at lower rate. The monetary measures will augur well for the growth of the economy, as access to funds at lower interest rate has been made possible,” Ramamurthy added.

Though the RBI should have done this at its credit policy review last week (Oct 24), banks will watch the situation and take pro-active decisions to enhance lending in the next couple of weeks.

“To sustain growth, banks will continue to lend. They will first reduce deposit rates and lower interest rate on borrowings subsequently, as cut in repo rate will ease the cost of lending,” the consultant opined.

Hoping that interest rates would not harden any more, Ramamurthy said access to more liquidity would encourage investment and funding by the industry across the board.

“The measures will also send positive signals to capital markets and bring back investors, especially retail, to the secondary market. Mutual funds will also be able to borrow and play an active role in the equity market at a time when foreign institutional investment has dried up,” Ramamurthy observed.

Expressing relief over the minimal impact of global meltdown on the Indian banking system, the World Bank consultant said prudent monitoring by the RBI and its cautious monetary measures even to the point being conservative had paid-off, as the Indian financial market remained insulated from the global turmoil.

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