MUMBAI, MARCH 1: Supplementing the initiatives taken by the Finance Minister in the Union Budget, the Reserve Bank of India (RBI) on Monday cut interest rates in a strong signal to spur economic growth. The central bank slashed the repo rate by 200 basis points to six per cent, bank rate to 8 per cent from 9 per cent and the cash reserve ratio (CRR) to 10.5 per cent from 11 per cent.The cut in the repo rate (interest rate on repurchases of government securities), bank rate (the rate at which the RBI lends funds to banks) and CRR (the chunk of deposits to be retained by banks with RBI - the major instruments of the RBI to control money supply and interest rates - will lead to a general decline in interest rates and release more funds into the banking system.Taking a cue, three of India's largest state run banks followed suit by slashing their prime lending rates (PLRs). With this, not only loans for corporates will become cheap, even the interest rates for housing loans are expected to fall State Bank ofIndia (SBI), Bank of Baroda (BoB) and Bank of India today announced cuts in PLRs. SBI chairman G G Vaidya said the bank's PLR has been reduced by one per cent point to 12 per cent, while the medium term prime lending rate (MTPLR) has been reduced from 12.75 per cent to 12 percent, with immediate effect.BoI has also pegged its PLR at 12 per cent.BoB chairman and managing director K Kannan said the bank would be lowering its PLR from 12.75 pc to 12 pc later this week. He said there would be no cut in fixed deposit rates, but a review would be undertaken shortly. The cut in the bank rate and the CRR is likely to boost banks bottomlines on account of depreciation write back on government securities .Justifying the cut in the interest rates after the budget, RBI governor Bimal Jalan said, "Some months ago I had already indicated my preference along with many others for lower interest rates, provided the conditions were right. In view of the lower inflation in recent weeks slow credit offtake and the nextyear's lower borrowing programme announced by the government in the budget the Reserve Bank's judgment now is that conditions are right for such a move." The CRR cut was superbly timed, analysts said, adding that this was the second last fortnight before March 31 when bank have to value their securities portfolio. Jalan declined to comment on the exchange rate, and the RBI said, "he did not want to comment except that there was no change at all in the Reserve Bank's policy in regard to management of the exchange rate".Yashwant Sinha had dropped strong hints about a possible interest rate cut. "I can only plead with the RBI governor as monetary decisions are not my domain. We have certainly created the right fiscal policy atmosphere," he told the captains of Indian industry.
