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  3. Bankers asks RBI to trim rates further in next monetary policy

Bankers asks RBI to trim rates further in next monetary policy

05 Apr 2013 Evaluate

Worried over the slowing credit growth, bankers, in their customary pre-policy meeting with the central bank, have asked the Reserve Bank of India (RBI) to trim both the repo rate and the cash reserve ratio (CRR) in its annual monetary policy, which is scheduled to be held on May 3. The repo is the rate at which the RBI provides short-term liquidity to banks, while, CRR is the amount of funds that the banks have to keep with the central bank. At present, the repo rate stands at 7.50% and CRR is pegged at 4%.

For the first quarter of FY14, top lenders sought for one percentage point cut in the repo rate and a 50-basis-point reduction in CRR for an effective and immediate transmission into lending rates. However, there are a few others who are confident that RBI Governor D Subbarao will try to provide a spur to growth by slashing the repo by 25 basis points and then go into a monetary pause till inflation starts to ease.

The RBI, in its mid-quarter review of the monetary policy held last month, reduced the policy rate by 25 basis points, however, as per the RBI, the headroom for further easing is quite limited given the elevated food inflation, recent change in fuel prices and the ballooning current account deficit (CAD), which dashed hopes of another repo rate cut in the near future.

However, the banks did not pass the benefit of 25 basis points cut in repo rate to their borrowers, citing tight liquidity situation in the banking system and firm borrowing costs. India’s CAD hit an all-time high of 6.7% of the country's GDP for the quarter ended December 2012 due to rising imports of oil and gold, while exports recorded flat growth for the period owing to a global slowdown.

Further, Indian banks' advances is expected to grow by a slower pace in FY13 as compared with the previous fiscal growth at 17% and also fell short of the central bank's projection at 16%, mainly hurt by lower demand for credit from companies in a slowing economy.

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