Another round of rate cut in credit policy likely

The Reserve Bank of India (RBI) is expected to send off signals on further reductions in the interest rates on short term and medium term de...

The Reserve Bank of India (RBI) is expected to send off signals on further reductions in the interest rates on short term and medium term deposits with banks through its new announcements on the repo rates in the forthcoming credit policy scheduled for November 3. Repo rates refer to rates at which banks repurchase government securities and forms the basis for all banks to work out their deposit and lending rates.

While this lowering of interest rates could come in as bad news for retired and senior citizens, it could bring cheer to India Inc and spur investments. Investors in Gilts or what are commonly called government securities are also expecting an innovative announcement in the form of the floating repo rate in the credit policy. If the floating repo rate is announced then short term interest rates on all instruments in the tenure of 30 to 91 days are expected to go down by around 1 per cent. The other option, which the apex bank, would consider is a 50 basis point cut on the overnight repo rate which would lead to a reduction of interest rates on all instruments in the tenure of 3 year to 10 years by 0.5 per cent.

By going in for a floating repo rate, the apex bank may allow the repo rate to align itself to the overall interest rate. According to sources, if the apex bank decides to go in for a floating repo rate, then in the immediate future the repo rate is expected to go down by around 100 basis points from the present overnight rate of 4.5 per cent. This implies that interest rates in the tenure of 30 to 91 days would also go down by the same magnitude. The apex bank usually tinkers with the repo rate in the credit policies while this year the apex bank made a departure and decided to go ahead with a repo cut in August.

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According to PNB Gilts managing director I.D. Singh, even if the floating repo rate announcement is delayed by the apex bank, it is expected that at least there would be a cut on the overnight repo rate. The industry analysts expect a cut in the repo rate by either 25 or 50 basis points. This would lead to a cut in the medium-term interest rates which have a tenure of around 10 years.

Sources said while in India the overnight repo rate rules at around 4.5 per cent, the global average is around 2.84 per cent. On repo rate of tenure of 10 years while the global average is around 4.82 per cent, the rate in India is around 5 per cent. There is not much difference in this segment. Either ways, if the RBI decides to go in for a floating repo rate or if it decides to cut repo rate by even 50 basis points, interest rates would align themselves and would go down.

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