RBI may cut rate, ease exchange curbs

MUMBAI: With banks having more funds than they can deploy, the Reserve Bank of India is expected to keep interest rates down in its forthcoming mid-term monetary policy review on October 29.A cut in the Bank Rate would reduce deposit costs for banks and thus protect their bottomlines.Bankers also see the central bank announcing further easing on the exchange control front, considering the steady rupee and rising forex reserves. Bankers say banks are not relying on borrowing from RBI for funds and there will be no direct impact of a rate cut on the liquidity front. If not a cut in Bank Rate, some bankers feel the RBI is very likely to announce a reduction in the repo rate considering the amount of cash lying in the banking system.A cut in the Bank Rate would also encourage banks to increase lending which has failed to take off except in the retail segment. Enabling the RBI to maintain an easy money policy is the inflation rate which is still around 3.5% as against the 5% level a year ago. Besides, with the government expected to exceed its borrowing programme by over Rs 15,000 crore, banks expect that the central bank will keep rates low to ensure a smooth movement of rates.Although traditionally it was felt that an interest rate cut would hurt the spreads earned by banks, the new thinking is that rate cuts will be more beneficial.Although deposit rate cuts reduce costs only for new deposits and renewals, they reduce the cost of almost 100% of the banks debt liabilities. While the rates on all loans come down with immediate effect, loans now account for only 54% of deposits. Moreover, banks also have long-term loans such as home loans where the interest rate is fixed. There are however divergent views on the interest rate front. According to a report by ICICI Securities, the chances of a rate cut have dimmed significantly. First, the recently released economic data suggests that industrial recovery is gathering steam.Second, the progress of monsoons has been better than initially envisaged.Third, the recent fuel price hikes and base effects will push the headline inflation number above the 4% mark in the next few weeks. Four, government finances have continued to deteriorate, with deficit likely to touch 6% of GDP this year.According to I-Sec all these factors are likely to weigh on the minds of the policy makers making it difficult for the RBI to force rates lower at its October review of the monetary policy.

RBI may cut rate, ease exchange curbs

With banks having more funds than they can deploy, the Reserve Bank of India is expected to keep interest rates down in its forthcoming mid-term monetary policy review on October 29.

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