MUMBAI, June 25: The Reserve Bank of India today slashed the bank rate by one per cent (100 basis points) to 10 per cent, signalling a lower interest rate regime. In a simultaneous move, it has also reduced interest rates on post-shipment rupee export credit by a similar margin.

The cut in the bank rate has immediately resulted in a cut in domestic term deposit rates as well as deposits under the non-resident (external) rupee (NRE) account. The domestic deposit rate ceiling for maturities between 30 days and one year has been reduced to 8 per cent (from 9 per cent before) and this could lead to a further fall in prime lending rates as well.

In the last credit policy the Reserve Bank had linked deposit rates to the bank rate. The top deposit rate for maturities up to one year is pegged 2 percentage points below the bank rate. Interest rates for maturities above one year, however, remain totally free.

This is the first time since the announcement of the monetary and credit policy for the first half of 1997-98 on April 15 that the country's central bank has sent money signals through the bank rate. In April, the Reserve Bank reactivated the bank rate and positioned it as a reference rate to signal its policy stance. This has already led to the rationalisation of the interest rate structure.

"With effect from the close of business today (June 24, 1997), the bank rate will be reduced by 1 percentage point—from the present level of 11 per cent per annum to 10 per cent per annum. All interest rates on advances from the Reserve Bank such as export credit refinance and general refinance to banks which are specifically linked to the bank rate will be revised downwards," the central bank's directive to all scheduled commercial banks said.

"Consequent upon the reduction in the bank rate... with effect from June 26, the interest rate offered on domestic term deposits of maturity of 30 days and up to one year will not exceed 8 per cent per annum, the RBI directive said.

The interest rate on NRE term deposits of six months and up to one year has been reduced to 8 per cent from 9 per cent.

Explaining the rationale behind the cut in the Bank Rate, RBI governor C Rangarajan said: "Interest rates have shown a definite and perceptible decline since mid-April 1997 across all maturities and instruments, including dated government securities, treasury bills, certificates of deposit and commercial paper. The prime lending rates of most banks have been reduced by one to one-and-a-half percentage points.

Besides this, the liquidity overhang in the system has also prompted the Reserve Bank's decision, leading analysts said. The aggregate deposits of the banking sector in the current fiscal have grown by Rs 13,447 crore (2.7 per cent) against Rs 3,856 crore (0.9 per cent) during the corresponding period in the previous year. Money supply (M3) growth in the current fiscal is pegged at four per cent against 3.1 per cent in the last year.

The Reserve Bank governor has attributed the development to the "relatively large and rapid accretion to foreign currency assets to the tune of Rs 6,228 crore in the current financial year as compared to Rs 944 crore in the corresponding period last year. The objective of the policy, according to him, is to keep money supply growth within 15-15.5 per cent and the inflation rate around 6 per cent.

During the current fiscal, the banking system's non-food credit has declined by Rs 1,672 crore as against a decline of Rs 6,253 crore crore last year while the investments have increased by Rs 2,392 crore (Rs 698 crore). "The total flow of bank funds to the commercial sector has increased by Rs 720 crore during the current fiscal as against a decrease of Rs 5,555 crore last year, registering a turnaround of Rs 6,275 crore," Rangarajan said.

The reduction in the Bank Rate has been interpreted as an effort to increase the lendable resources of the banking system further and push down interest rates.

On the export credit front, the interest rate on post-shipment rupee export credit on demand bills for transit period and on usance bills for a total period of up to 90 days has been reduced to a level "not exceeding 12 per cent per annum" from 13 per cent. Similarly, the interest rate on post-shipment credit beyond 90 days and up to six months have been reduced to 14 per cent from 15 per cent.

The Reserve Bank signalled lower interest rates on post-shipment rupee export credit up to 90 days even in the last credit policy. The interest rate on post-shipment rupee export credit up to 90 days was changed to a ceiling rate of 13 per cent per annum rather than a fixed rate of 13 per cent in the previous policy, indicating that banks can lower the rate for good customers.

The Reserve Bank will continue to provide commercial banks export credit refinance on the basis of their incremental export credit. "With effect from the fortnight beginning April 26, banks will be provided export credit to the extent of 100 per cent of the increase in outstanding export credit eligible for refinance over the level of such credit as on February 16, 1996," the last credit policy document had said.

With the cut in the Bank Rate, the rate of interest on export refinance has also been brought down to 10 per cent.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.