RBI hikes bank rate, cash reserve ratio

The central bank raised the benchmark bank rate (BR) – the rate at which it lends to other banks – to 11 per cent from nine per cent with immediate effect. With this, most banks and financial institutions are now expected to to raise their prime lending rates (PLR) in line with the new bank rate. They will, however, wait for a few days to see if the RBI withdraws its steps once the rupee becomes less volatile.

Forcing exporters to bring back dollars kept abroad, the RBI decided to cut export refinance limit to 50 per cent from 100 per cent. The cut is applicable on the increase in outstanding export credit eligible for refinance over the level of such credit as on February 16, 1996.

The RBI also decided to reduce the general refinance limit to 0.25 per cent of the fortnightly average outstanding aggregate deposits in 1996-97 from the existing rate of one per cent. In a related measure, RBI raised the interest rate at the fixed repo to 9.0 per cent from 7.0 per cent with immediate effect.

It also decided to increase the interest rate surcharge on import finance to 30 per cent from 15 per cent. The reverse repos facility would be available to primary dealers in government securities market at the bank rate, but on a discretionary basis and subject to some regulations. RBI said it decided on these measures “after a review of current status of foreign exchange markets, measures already taken and recent international developments.”Reversing the decision taken some days ago, the RBI had decided to replace the across-the-board stipulation on maintenance of square/near positions with imposition of such rules for individual banks as and when warranted.

“In order to meet genuine operational requirements in forex transactions,” RBI has decided to consider requests of individual banks in regard to limits on nostro account balances.

As a result of RBI measures, deposit and lending rates are likely to go up by 200 basis points, said Chandan Sinha, chief dealer at Securities Trading Corporation of India (STCI). “The rise in the bank rate by the Reserve Bank will push up interest rates by 2.0 percentage points,” Sinha said. This means PLRwhich came down recently will once again start moving up.

This is expected to slow down credit outflow from commercial banks to the corporate sector. The rise in interest rates will also affect the performance of the corporate sector which was expecting to improve its bottomline in the current year. Investments in new projects by the corporate sector are also likely to be affected as the cost of borrowing will go up significantly.

Cut in petro-products

Government tonight slashed prices of some petroleum products like naptha, furnace oil and LSHS (low sulphur heavy stock distillate) up to 10 per cent in the wake of worldwide downtrend in oil markets.

Price of naptha, an important industrial feedstock, was slashed by Rs 180.30 per metric tonne from the prevailing level of Rs 7624.09 to Rs 7443.79, an official statement said, adding that new prices would be effective from midnight tonight.