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Loans to get cheaper as RBI cuts key interest rates

Started by sajiv, Dec 10, 2008, 05:13 AM

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Mumbai - India's central bank, the Reserve Bank of India (RBI), slashed its key interest rates on Saturday, bringing down its short-term lending rate or repo rate and the reverse repo rate (the rate at which the central bank absorbs excess cash from the system) by 100 basis points (bps) each, in a move which is expected to make corporate borrowings cheaper and boost consumer spending.

Along with the rate cuts, the central bank also took steps, Saturday, to provide refinance facility of up to Rs.7000 crore to the Small Industries Development Bank of India (SIDBI) to promote funding for small industries and, in order to increase flow of funds to the ailing real estate sector, it gave the National Housing Bank (NHB) Rs.4000 crore refinance facility and encouraged the banks to lend to the housing sector by according "priority sector" status to housing loans up to Rs.20 lakh.

The apex bank also put a cap on the cost of some export credit to boost the export industry and allowed select banks to buyback foreign currency convertible bonds (FCCBs) from customers to "take advantage of current discounted rate at which these bonds are trading."

The RBI governor, after announcing the measures, said that he expected "that the banks will take a signal from the rate cuts" as the ongoing credit crisis has deprived companies and consumers of much needed funds. India's central bank has been easing monetary policy since October, joining global peers in pumping cash as credit markets freeze.

"The reduction in repo and reverse repo rate should result in a reduction in marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms," D. Subbarao said at a news conference on Saturday.

Responding to the central bank's call, several banks have already announced cut in their benchmark prime lending rates (BPLRs) while others promised to take similar steps within the next 4-5 days.

"The cut in repo and reverse repo would complement the stimulus package that the government might also announce. Through the cuts, the RBI is sending a message to banks that they must not only cut lending rates but also bring down their deposit rates," said Harihar Krishnamurthy, country treasurer at Development Credit Bank.

"Today's rate cuts indicate very strongly the RBI's concern to bring down interest rates. Liquidity is not an issue - it has been taken care of through the earlier measures," said Yogesh Agarwal, chairman and managing director, IDBI Bank.

Overnight call rates would definitely come down, he said, adding, "in a little while, both deposit and lending rates should also come down."

Public sector lender Dena Bank's chairman and managing director, P.L. Gairola, said that the RBI rate cuts were expected and that the apex bank "has sent a strong signal for interest rates to soften."