MUMBAI, June 25: The Reserve Bank of India (RBI) has announced another reduction in the bank rate (BR) by one percentage point from the current level of 11 per cent to 10 per cent per annum with effect from Wednesday.

This has led to a one percentage point reduction in the interest rate on short-term deposits (between 30 days and one year) to 8 per cent.

The RBI move is expected to lead to further drop in lending rates. The central bank has sent a clear signal to the commercial banks to reduce their prime lending rates (PLR) - the rate at which banks lend to blue-chip companies - which is now linked to the BR.

The RBI decision comes in the wake of poor credit offtake from the banking sector in spite of a sharp decline in the rate of interest.

As per the last credit policy, the interest rate on short-term deposits will be two percentage points below the bank rate. As a result, interest rates on domestic term deposits for maturity of 30 days and up to one year and non-resident external rupee account scheme have been reduced by one percentage point to eight per cent, said an RBI release.

The interest rates on post shipment rupee export credit have also been reduced by one percentage point.

Interest rates on post-shipment export credit up to 90 days will now `not exceed 12 per cent per annum' and that `beyond 90 days and upto 6 months 14 per cent per annum'. All interest rates on advances from the RBI such as export credit refinance and general refinance to banks which are specially linked to the bank rate will also be revised downwards.

It may be recalled that the RBI took several steps two months ago towards reducing interest rate by one percentage point cut in the BR to 11 per cent. The RBI had at that time announced that the central bank's signals to the money market will come primarily through the BR which was last changed in 1991.

The one percentage point cut in the BR will immediately result in a cut in the deposit rate ceiling for maturities upto a year to eight per cent and this signals a fall in PLR as well. Under the revised system, the top deposit rate for maturities upto one year will be two percentage points below the BR. However, interest rates for maturities above one year will remain totally free.

Commercial banks are expected to follow suit by reducing their PLR further. State Bank of India and other banks are likely to reduce the PLR from 14 to 13 per cent. When BR was reduced in the credit policy, commercial banks had cut the PLR.

In the current financial year, many banks were flush with funds which could not be properly deployed due to lack of demand from industry. The performance of the corporate sector has also been hit by the high interest cost incurred during the year to finance various projects. One of the reasons for poor corporate results has been the skyrocketing interest burden during the liquidity crunch period.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.