RBI may to cut the policy rates further
By Vaibhav Aggarwal
Nov 18, 2008
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Indian's largest lender, State Bank of India (SBI) is inclined towards a further reduction of policy rates by the Reserve Bank of India (RBI). As inflation in the country has dipped down to 8.98%, the CII Chief and ICICI Bank Chairman K V Kamath also expect the policy rates to come down in order to support growth in the system.

At the India Economic Summit Mr Kamath said, "Interest rates are still high. Inflation has fallen to single digit, I think that would give confidence (to RBI) to roll back or signal drop in interest rate."

SBI Chairman O P Bhatt said: "Interest rates (by RBI) should be lowered further otherwise the kick-start in economy won't take place."

"Since the commodities prices and inflation are going down and the efforts made by the regulatory authorities all over the world to lower the benchmark and repo rate, I expect interest rates will come down. But it would be difficult to say when it will go down", added Mr Bhatt. He further said that the liquidity condition has improved a lot compared to the first week of October.

Ever since October, the apex body has announced several cut in the policy rates. The short term lending rate (repo) has come down by 150 basis points while the mandatory cash reverse (CRR) and investment in government securities (SLR) has also been cut by 350 and 100 basis points respectively.

Not only have the leading lenders, SBI and ICICI anticipated this cut but others bankers are also expecting that RBI would reduce the repo rate and CRR, thereby signaling banks to further lower their lending rates.

"If the low inflation sustains for a period of two to three weeks, the Reserve Bank might reduce CRR and repo rate further...this may give room to banks to cut their interest rates again," said T S Narayanasami, Chairman and MD of Bank of India.

Responding to the recent policy measures, almost all public sector banks including SBI have lowered their prime lending rates by 75 basis points.

M V Nair, CMD, Union Bank of India feels that if there is a further reduction in the cost of funds then the banks are likely to review their rates again. "If RBI again takes further action that may have an impact on interest rates. If the cost of funds is coming down further, this may help banks to lower their rates again," Nair said.

The dip in inflation to a single digit after a gap of five months is the major reason for banks expecting a further cut in the policy rates.


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