The Reserve Bank of India is expected to announce another round of rate cuts in a week or so in an effort to ease liquidity and reduce borrowing costs to counter slowing economic growth, senior government officials told Business Standard.
A meeting chaired by Prime Minister Manmohan Singh at his residence Monday and attended by RBI Governor D Subbarao and Finance Minister P Chidambaram, among others, discussed a 50 to 100 basis point cut in the cash reserve ratio, the repo rate, the reverse repo rate and the statutory liquidity ratio.
The rate cuts are expected to infuse Rs 80,000 crore into the banking system.
The RBI is also likely to create a special repo window to allow banks to borrow up to 100 basis points of SLR--the percentage of deposits invested in government securities--to make available Rs 40,000 crore for infrastructure like national highway projects. The RBI is expected to lend to banks at the repo rate and ask banks to on-lend to companies at lower margins under the facility.
Measures like providing additional liquidity to non-banking finance companies were also discussed, sources added.
Others attending Monday's meeting were Commerce Minister Kamal Nath and Planning Commission deputy chairman Montek Singh Ahluwalia.
Officials said the cut in repo (the rate at which RBI lends to banks) and reverse repo rate (the rate at which banks lend short-term money to RBI against government securities) are expected to act as a strong signal to banks to cut interest rates sharply.
These proposals follow a series of measures by the RBI over the past two months, which included paring CRR, the proportion of cash banks must keep with the RBI, 350 basis points to 5.5 per cent and SLR 100 basis points to 24 per cent and creating a Rs 60,000-crore special window for banks to draw on.
The repo rate has been cut 150 basis points to 7.5 per cent, but the reverse repo rate continues at 6 per cent. Interest rates on non-resident deposits have also been raised in a bid to attract more liquidity.
In response, government-owned banks lowered prime lending rates by up to 75 basis points, but large private lenders like ICICI Bank and HDFC Bank are yet to do so.
Monday's meeting was part of a coordinated policy action initiative by the government, RBI and stock market regulator Securities and Exchange Board of India to check the decline in business confidence following the global financial crisis, the impact of which is now spilling over into the real economy.
A committee of officials, headed by Finance Secretary Arun Ramanathan, has met six times in the recent past to consider measures to revive credit availability and other demands of industry. Meanwhile, Chidambaram met Subbarao and other officials this morning and was later joined by ICICI chief executive and CII president KV Kamath.
Soon after the meeting, Kamath told reporters, "There is further scope for a 250 basis point cut in the CRR and, if the situation warrants, a cut in the SLR too."
Kamath added that with the recent sharp drop in the annual wholesale inflation rate (which stood at 8.98 per cent for the week ended November 1 from a high of nearly 13 per cent in August), there are indications that inflation would come down to 5 per cent earlier than estimated.
"Banks are awaiting policy clarity. They do not want to hoard but they are waiting for a signal that inflation is truly beaten," Kamath said, adding that he expects the policy of aligning interest rates with growth to continue.
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