RBI might exercise rate cut option
By Joseph Samson
Jan 24, 2008
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New Delhi: The 75 basis point reduction in Fed rate yesterday has left the Indian bankers optimistic about a similar step being taken by the Reserve Bank of India (RBI). The monetary policy review is slated for the end of this month and, while earlier the bankers were skeptical about any such move, now the mood seems upbeat.

The US Federal Reserve, was first to announce the rate cut, followed by the Bank of Canada, which also slashed its interest rates by 25 basis points. This step is being seen as an emergency measure to prevent the much touted recession in US economy.

Bankers believe that RBI may follow suit and this was echoed by a finance ministry source, which said, "The overall impact should be positive for the markets. However, it would increase the interest rate differential and make external commercial borrowings (ECBs) more attractive. This could prompt RBI to go for a cut in domestic interest rates."

The Cash Reserve Ratio and Repo rate cut is very much on the cards since the RBI cannot remain insulated from the global economic scenario. Industry experts believe that the January 29 date, on which a statement from RBI is expected, can be pre-poned and RBI may announce a cut much earlier.

The Finance Minister’s plea to the banks for reducing the lending rates by 50 basis points to give the necessary push to the economy might finally be implemented by the banks if the get adequate positive signals from RBI. Currently, though State Bank of India (SBI) and ICICI Bank are offering festive discounts on various retail loans till January 31 this year, whether this discount will continue or not and how many more banks will be able to offer discounted rates will depend hugely on the RBI’s decision on rates.

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