RBI Governor not in favour of large rate cut

The government seems to have come up with a three-pronged strategy to bolster India's economy.

Following a cut in the prices of diesel and petrol, the Reserve Bank of India (RBI) is to announce a cut in rates, just before the government's anticipated fiscal sops. Media reports said that the RBI could lower the repo rate by around 50 basis points, though the reverse repo rate could be lowered by around 100 basis points. 

News television channel NDTV reported that the RBI governor is not in favour of large rate cuts, and therefore the interest rate corridor between the reverse repo and the repo rates, which is presently at six per cent and 7.5 per cent, would widen to around five and seven per cent. Reports suggested that the RBI at the present time would choose not to exhaust all its options by cutting rates significantly. 

Home and auto loans are likely to become a tad more affordable, with a number of public sector banks reported to be ready to revise their lending rates if the RBI chooses to ease its monetary policy. Since October, the RBI has brought down the repo rate from nine to 7.5 per cent, though it chose to leave the reverse repo rate unchanged. The reverse repo rate is the rate at which banks place funds with the RBI for a short term. 

Reports suggested that the RBI would not touch the cash reserve ratio (CRR), which requires that banks keep a percentage of their deposits with the RBI to ensure liquidity.

News agencies quoted SBI chairman OP Bhatt as saying that the State Bank of India would consider revising its lending rates downwards, as soon as the RBI cuts its rates. They also said that Punjab National Bank, the third largest lender in the country, said that a change in the monetary stance of the RBI would ensure that interest rates would soften.

RBI governor Subbarao had said a slowing economy and a decline in commodity prices have helped inflation to drop ''faster'' than expected. Crude oil prices in New York have fallen 70 per cent their record high of $147.27 per barrel of July, to their present levels of $43.92.