Rate Cuts By RBI

As I was posting from many days, yesterday [04/03/09] finally RBI reduced the Repo & Reverse Repo by 50 Basis Points. Repo rate reduced to 5% from 5.5% & Reverse Repo to 3.5% from 4% with immediate effect.

And in previous posts I clearly mentioned that there is no need to reduce the CRR further as liquidity is not the problem for us now. It has been reduced to quite substantially from its peak levels of 9% in October to present 5%. Compared to October & November when Lehman Brothers collapsed, suddenly international lending/transaction stopped for some movement. This lead our call money rate go beyond the corridor of repo & reverse repo and reached round about 20%. And as of yesterday's closing call money rate is in the range of 2.25% to 4.30% which is well within the range of repo & reverse repo limits.

This move was expected by many experts & economists, because there are various indicators which were indicating towards RBI. For example Inflation coming below 4%, to be precise 3.36%, GDP growth of 3rd quarter contracting to 5.3% from expected 6.1%, fiscal stimulus should be followed/supported by monetary stimulus, no room,time & authority [with the central government] for further fiscal stimulus packages, fiscal deficit going beyond the expectation & etc.

As I said before also cut in reverse repo will force the banks to lend rather than going for safer route of depositing with the RBI for assured returns. Now because of low returns with the reverse repo rates, banks will be forced to think of other alternative, that is lending to clients & customer for higher lending rates varying from 10% to 18% [depending upon the purpose], as lending rates are yet to come down. Once the lending starts towards the various sectors & various sizes of the sectors [small, medium & large scale], the economy will start productive work. This lead to more jobs across the all working capable men/women. If you see the call money rates there is room to cut reverse repo further but that can be done in subsequent stages by looking at the conditions.

And talking about the Repo rate it has come down from 9% in October to 5% now. Because of this cost of capital will be a lesser burden to banks as compare to October condition. But only this move cant help the normal person. As in the time crisis everybody including banks wants to play safely as there is risk of default & rise in their NPA [Non Performing Assets]. So this move should be accompanied by cut in reverse repo as RBI has done/been doing.

But in addition to this there should be some clear cut criteria for lending norms. There should be clear regulation & ratings for corporates & individuals depending upon various parameter like risk aversion quality, past history, line of business, scope for the business, effect present conditions to business & etc.

Now government & governor of RBI should persuade the various bankers to lend & transform the benefit of RBI cuts to end user. Because banks, financial intermediaries can act as very important role in both development as crisis situation. In 1930s great depression time, situation aggravated because banks stopped lending & ultimately causing problems themselves also since almost 11000 out of 25000 banks collapsed in US at that time. So somebody has to take the initiation in reducing the rates. SBI, India's largest bank already reduced the deposit rates for various maturity periods. So I hope it will be followed by reduction in lending rates & other banks will also follow the path...