RBI cuts CRR by 0.5%; repo, reverse repo by 1%

The Reserve Bank of India has cut the cash reserve ratio by 50 basis points, and both the repo and reverse repo rates by 100 bps. (100 bps=1%) The CRR now stands at 5%, while the repo rate post the cut stands at 5.5% from 6.5% earlier. The reverse repo rate is now at 4% from 5% earlier.

In a statement, RBI said, “The reduction in the CRR will inject additional liquidity of around Rs 20,000 crore to the financial system. It is expected that the reduction in the policy interest rates and the CRR will further enable banks to provide credit for productive purposes at appropriate interest rates. The Reserve Bank on its part would continue to maintain a comfortable liquidity position in the system.”

"The fundamentals of our economy continue to be strong. Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India would recover sharply. But a period of painful adjustment is inevitable," it stated.



Commenting on the rate cuts, Pawan Goenka, Board Member, Mahindra & Mahindra, and Vice-President, Society of Indian Automobile Manufacturers, believes that unless banks start lending money for retail financing and bring down interest rates, there is not much help in terms of getting financing rates down. “The important thing to see is whether banks will now take this cue and start reducing interest rates, especially for retail financing of automobiles, which so far hasn’t happened in any significant manner.”



Here is a verbatim transcript of CNBC-TV18's Latha Venkatesh's comments on CNBC-TV18. Also watch the accompanying video.



The first problem for the bankers to react immediately is everybody’s rate cut came into effect yesterday. So, it is 8.5% probably for SBI as of yesterday and so too with Bank of India and all the big banks. ICICI Bank too cut its rates. ICICI Bank has a problem because they could not reduce their deposits as much as the PSU bankers. They were offering a good 100 bps more than SBI. They have brought it down by 50-75 bps across several tenures. They are still about 1% point higher. That is the problem. The costs are still high. So, immediately bankers were saying that we will react in February if they get 50 bps on reverse repo. Now with 100 bps on reverse repo we have to ask them.



Clearly bankers will have to admit that this is better than what they expected. A big bang announcement was not expected. Expectations had gotten muted. This is 100 bps on both reverse repo and repo, and coupled with the sweetener of 50 bps CRR is clearly better than they bargained for.



But liquidity is going to be released in other ways also. The bankers themselves almost gave it away that they will consider a second rate cut in this month itself. Most of them have cut their rates with effect from January 1. But another review of their rates, another pushing down of rates – deposit and lending – looks certainly on the cards, the bankers were willing to concede that.



The two hurdles that bankers face to pushing down their rates or to make lending effective. One is the sheer caution in terms of lending. That kind of gets taken care for certain sectors, for instance the commercial vehicles, the state governments have been allowed to use the JNNURM funds to buy buses. So, the feeling with the banker is that somewhere demand is getting generated. So, let me give the auto ancillary and the CV guy a second look when he comes for a loan.



Likewise, the depreciation allowed for commercial vehicles has been extended at least for one quarter. All this emboldens lending by the bankers. So, caution to some extent gets taken care of.



Also they get more competition now in terms of sources of loans for corporate sector. ECBs, there is no limit to the extent at which you can pay over LIBOR to get an ECB.



That will also mean that perhaps a little more ECBs will come in. NBFCs are also being allowed some kind of liquidity because their investment grade paper will be taken in exchange and they will get a line of credit. All this could loosen up some amount of money in the system in terms of competition and this might also pressure banks into lowering their lending and to increasing the amount of lending they do.



All said, we should look at announcements from banks, not rightaway but in a couple of weeks, and we should see effective borrowing coming down for corporate India. One because bond rates itself will fall. You should expect the 10-year bond yield to fall. It touched a low of 5.18% and then it had risen to 5.4%. You should expect it to move towards the 5%. If it does not break 5% it is only because of a fear that the government could be resorting to extra borrowing.



Beyond that, you should expect the corporate bond also to move down because the government of India bond has moved lower in terms of yields. So that also will allow corporates to borrow from the market and it is the banks who are lending that corporate bond market. The FIIs have been allowed to invest more in the corporate bond market. So, all said, you must expect banks to lend more and lend more cheaply and you should expect financing costs for corporates to come down.



Sajan Jindal of JSW Steel said, “The coordinated effort by the government and the RBI is a good move. To give a boost and growth to the economy, the key factor is going to be the interest rates and interest rates for the borrowers and the corporates must be in single digits and that is what is going to drive the economy. That’s what I believe these steps which are being taken by the government and the RBI will drive the Interest rates down."



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