Central Bank Of India(RBI)Slashes Rate to Save Economy..

by Amitjha | January 2, 2009 at 08:01 am

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RBI is in aggressive mood, following the international trend of rate cut it has reduced the rate to infuse money in the market.Last package of $4bn did not had the expected impact.The lending rate of all major banks are still too high for the common man.The move is more to save the bank than helping the consumer, unless people get direct benefit it will be tough for the banks to mobilise the saving and attract customer to invest.

Which way the elephant will move whether towards forest or towards Dalal(wall)street time will tell, but sentiment is certainly not in favour of market.

The government on Friday announced a fresh stimulus to reverse the economic slowdown, taking its total revenue loss to Rs 40,000

crore, through higher public spending and easier credit especially for exports, housing and small industries.

Simultaneously, RBI slashed key policy rates and ratios to pump in an additional Rs 20,000 crore into the banking system, while government asked PSU banks to increase credit targets to ensure maximum fund disbursals at the least cost, particularly when inflation is ebbing.

Signalling a shift in focus from inflation management to growth, the package -- the second in a month and the last for this fiscal -- is part of a process initiated by the government and RBI in October in the face of crumbling financial system and recessionary pressure in the West.

The RBI had during the period released over Rs 3,20,000 crore into the banking system to usher in a low interest regime in the economy, as prices of fuel, metals and agri commodities plunged easing inflationary pressure.

Announcing the much-awaited package, Planning Commission deputy chairman Montek Singh Ahluwalia told reporters: "Other measures designed to counter recessionary trends" include withdrawal of countervailing duty exemptions on some steel products and cement originally provided to contain inflation.

"Banking system is a very critical and PSU banks need to be recapitalised," he said.

The RBI signaled interest rates to ease further by slashing the short-term rates at which it lends and borrows from banks (repo and reverse repo) by 100 basis points each.

It also cut the percentage of money that banks need to keep in reserve by 0.50 percentage points, thus releasing Rs 20,000 crore into the system.

"You will certainly have a fiscal deficit which will be more than 3 percentage point of GDP above what was originally targeted. These are Planning Commission estimates...," Ahluwalia said indicating fiscal deficit would be over six per cent this year.

The government package also provides for recapitalising them by Rs 20,000 crore over the next two years.

While allowing states to access market for borrowing about Rs 30,000 crore to meet additional expenditure, the package provides for easing External Commercial Borrowing norms and raising FII investment limit in rupee-denominated instruments to USD 15 billion from USD six billion now.

Special attention was paid to housing sector, auto, macro and micro industries and infrastructure sectors through a series of measures including provision for higher credit and greater liquidity for the non-banking financial companies.