M A I N   N E W S

0.5 pc cut in bank, CRR rates
Markets improve on RBI steps

Mumbai, February 16
The Reserve Bank of India (RBI) today made a reduction in the bank rate as well as the cash reserve ratio (CRR) by half a percentage point each with effect from the close of business hours today.

In a statement, the RBI said it had made a review of recent developments in the international and domestic financial markets and decided to lower the bank rate from 8 per cent to 7.5 per cent.

Similarly, the Central bank effected a reduction in the CRR by 0.5 percentage point from its present level of 8.5 per cent to 6 per cent in two stages by 0.25 percentage point each, effective from fortnights beginning February 24 and March 10, respectively.

This measure would release resources of scheduled commercial banks to the extent of about Rs 2,050 crore at each stage, the RBI statement added.

The bank rate is the rate at which the RBI does most of its lending to commercial banks. It is used as a reference by banks to set their lending rates.

Bond prices jumped immediately after news of the cuts, with the 10-year bond rising by a steep Rupees 0.41 to 106.75.

Some easing of the cost of credit had been expected ahead of the February 28 Budget in order to underpin the government efforts to revive the slowing economic growth.

Economists said, however, that they were disappointed that the RBI had not been more aggressive.

“The cut was expected, but the size was well below my expectations,” said Mr Sanjit Singh, debt analyst at the ICICI Securities and Finance Co.

“I had expected a 100-basis-point cut in the bank rate,” he said.

“The rate cut will only help financial services and banking stocks,” added Mr Nilesh Shah, Portfolio Manager at Kotak Securities. The spot rupee recorded a moderate recovery against the US dollar as well as a drop in the forward premiums immediately after the RBI’s announcement, while equities reported a firm start in the evening trading at the over-the-counter exchange of India, market sources said.

“The CRR cut alone will infuse liquidity of about Rs 2050 crore in the banking system in a phased manner, which will strengthen market sentiments,” said a forex dealer. UNI