Andhra Bank was the first lender to cut rates to 9.75 per cent.
The Reserve Bank of India cut its policy rate by a surprisingly wide 50 basis points Tuesday as falling inflation allowed for greater policy breathing room – a moved aimed at keeping India’s economy growing despite a global slowdown and sluggish domestic business.
Mr. Rajan said markets have transmitted the RBI’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent.
The largest public sector lender is the latest one to follow the suit after Raghuram Rajan surprised everyone by slashing repo rate by 50 basis points.
“In India, a tentative economic recovery is under way, but is still far from robust”, RBI governor Raghuram Rajan wrote in the bank’s monetary policy review for its meeting in Mumbai.
The Reserve Bank of India (RBI) reduced its repo rate to 6.75% from 7.25%, with economists having forecast it would trim rates to 7%.
The new base rate will be effective from October 5.
Still, it is unusual for the RBI to lower interest rates in September, as it has tended to be on the defensive against food price pressures during the monsoon season running from mid-June through September, after enduring several years of weak rains.
The ministry announced a plan to review a small savings programme that competes with banks for deposits to ensure faster transmission of rate cuts.
Meanwhile, Sensex rallied almost 500 points from day’s low on Tuesday after the RBI announcement despite tumbling down around the global equity markets in the wake of recession trends. Whenever banks have any shortage of funds they can borrow from the RBI. The median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions.
ICICI Bank CEO Chanda Kochhar said: “Clearly interest rates will come down, base rates will come down”.
“The direction and the quantum of rate reduction are clear”. “The RBI seems to have done its bit now while passing the buck to the government and the banks”.
The reduction in the repo rate to 6.75 percent was the fourth rate cut this year.
The move comes amid widespread call for reducing rates by other banks and analysts and at a time when inflation is running at a record low and the economy in danger of slowing down.