RBI to cut key interest rate to spur economy

Monday, 28 October 2002, 08:00 Hrs
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NEW DELHI: The Reserve Bank of India (RBI), the country's central bank, is expected to cut key interest rates in its credit policy to be unveiled Tuesday to stimulate industry investments in a slowing economy.

Banking experts and industry representatives say that the RBI's mid-term monetary policy review would provide crucial clues on the strength of the economy that is likely to be hit by severe drought in some parts of the country this year.

"The issue is what the RBI's policy can do to stimulate the economy against the backdrop of an elusive industrial recovery and a drought situation," said T.K. Bhaumik, an economist with the Confederation of Indian Industry (CII).

"The main thrust of the policy has to be how to increase the momentum of economic recovery. In this context, a reduction in key bank rate, which was long overdue, is likely to be announced by the central bank tomorrow," Bhaumik told IANS.

"Although a 25-50 basis point reduction in bank rate may not translate into increased credit off-take by the corporate houses, yet it would definitely send a positive signal to the industrial sector."

Indian industry has been long clamouring for a cut in benchmark bank rate - rate at which RBI lends to other commercial banks -- that some analysts see as vital to revive demand in a sluggish economy.

In April, the RBI announced a cut of half a percentage point in the cash reserve ratio (CRR) -- the percentage of funds banks must deposit with it -- while leaving the key bank rate unchanged at 6.5 percent.

The bank had said it would continue to maintain current interest rate environment with "a bias towards softer interest rate regime" in the medium-term, unless circumstances change unexpectedly.

Although there have been substantial resources for lending with banks due to reduction in CRR and prevalence of soft interest rate regime in the last few months, credit off-take has not picked up due to low level of economic activity.

Analysts say a cut in bank rate will send a strong signal to the commercial bankers to bring down the prime lending rates, the interest rate at which they lend money to their large customers.

"While the banks are flush with funds, there aren't any big borrowers in the market because of relatively high interest rate. A cut in lending rate may have some impact on the industrial credit off-take," said Bhaumik.

The central bank's credit policy is also expected to review its economic growth forecast for the year ending March 2003, with a drought likely to dent agriculture sector output.

Agriculture, accounting for about a quarter of the gross domestic product, is crucial to India's economy.

Rainfall in the country was 24 percent lower than normal in the annual monsoon season. Even though the monsoon revived towards the end of the season, the country continues to feel the impact of its worst drought in more than 15 years.

In April, the RBI had forecast gross domestic product would grow 6.0-6.5 percent this year.

"I think the central bank would revise the growth target to five percent from its earlier estimate in view of the drought condition," said Saumitra Chaudhuri, a senior economist with credit rating firm ICRA India Ltd.

The Reserve Bank had also said in its annual report for its financial year ended June that it would review its growth forecast at its mid-term monetary and credit policy review in October.

India's economy grew by a meagre four percent in the year ended March 31, 2001, compared to a 6.1 percent growth logged a year earlier.
Source: IANS
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