PPF rate cut 8212; ICICI slashes PLR by 1

MUMBAI, JANUARY 17: Banks and financial institutions have started reducing the interest rates following the reduction in interest rates in...

MUMBAI, JANUARY 17: Banks and financial institutions have started reducing the interest rates following the reduction in interest rates in the government8217;s small savings scheme and PPF rates. ICICI Ltd has taken the lead by cutting its long term prime lending rate by 100 basis points to 12.5 per cent.

quot;In line with the expected trend, there has been a 100 basis point reduction in the long term prime rate and 50 basis point reduction in the short term prime rate and medium term prime rate to 12.5 per cent,quot; ICICI said in a statement, adding that the revised prime lending rates will take effect from Tuesday. The short and medium term rates, too, will be 12.5 percent, it said.

Other FIs like IDBI and IFCI are likely to follow suit. Commercial banks will also be forced to slash their lending rates soon as the Reserve Bank of India is expected to cut the benchmark bank rate 8212; the rate at which the RBI refinances banks 8212; by one percentage point to seven per cent soon.

Traders also expect that the RBI mayannounce a cut in banks8217; cash reserve ratio CRR shortly. quot;The government has signalled a low interest rate regime. It is only a matter of time before the RBI cuts the rates,quot; a primary dealer said.

The move to lower rates is the result of intense lobbying by corporate sector to lower real lending rates. The reduction in the rate of inflation has led to a spike in real interest rates, which has adversely affected investment plans by corporates. Companies have also complained bitterly about the high real interest rate prevailing in the country, which puts them at a competitive disadvantage compared to interest rates prevailing in other countries.

quot;The only concern of the central bank is the profitability of the public sector banking industry which is under considerable strain this year. However, it is likely to cut the the bank rate soon and the banks will be left with no choice but to lower the lending rates as the finance ministry has corrected the anomaly in the overall interest rate matrix by slashingthe PPF rates,quot; banking sources said.

Sinha is expected to annouce a similar cut in provident fund PF rates next month when he announces the budget for 2000-2001. However, the RBI is likely to effect the bank rate cut well ahead of the budget and it may follow it up with a cut in banks8217; cash reserve ratio CRR later next month to ensure adequate liquidity in the system.