RBI Governor D Subbarao is expected to unveil a host of measures on Saturday, which bankers expect may signal rate cuts through slash in key policy rates like repo and reverse repo.
According to sources, the RBI is likely to cut short term rates (repo and reverse repo) at which banks borrow and lend money to central bank in lieu of government securities.
Since October, the RBI has reduced repo rate from nine per cent to 7.5 per cent. However, the central bank has not changed reverse repo rate, at which banks park money with the RBI for short term.
However, RBI is unlikely to tinker with Cash Reserve Ratio, a requirement for banks to keep part of deposits with central bank, as liquidity with banks is not a major issue.
The country's largest lender, SBI today said in Delhi that that it would consider further cuts in the lending rates following the Reserve Bank's monetary measures.
SBI will definitely consider rate cuts soon after the RBI slashes rates, SBI Chairman OP Bhatt told PTI. Meanwhile, India's third largest lender Punjab National Bank too said that the monetary stance of RBI is to ensure that interest rates will soften.
RBI is giving the clear signals and interest rates will move southwards, PNB Chairman K C Chakrabarty said. On why private sector banks are not cutting the interest rates, he said,"We will put pressure on them to reduce rates."
RBI Governor D Subbarao had on Thursday said, "we will try to maintain a comfortable liquidity position, and see that the weighted average overnight money market rate is maintained within the repo-reverse repo corridor."
Chakrabarty said, "We have done it (reduced interest rates). We are committed to do it on continous basis as an when we feel it is necessary and have capability to do that."
PNB is on the forefront as far as the reduction in interest rates are concerned, he said, adding "today my rates are lowest in the system."
While public sector banks have cut lending rates by up to 75 basis points following their meeting with the then Finance Minister P Chidambaram, private sector lenders have not done so, despite assurances given to Finance Secretary Arun Ramanathan.
In fact, ICICI Bank CEO and MD K V Kamath has asked for further rate cuts by RBI so that banks could cut interest rates by 200-300 basis points.
Chidambaram had also said recently that private sector banks will be forced to cut lending rates following pressures from competition with their public sector counterparts.
The Reserve Bank has already injected Rs 2,75,000 crore (Rs 2750 billion) into the system by cutting CRR, Repo in phases.
Chief Economic Advisor Arvind Virmani said the Reserve Bank has to ensure that money supply and credit growth are appropriate in the system so that no critical hurdle comes up in the way of economic growth amid global financial crisis and uncertainty.
"There has been liquidity issues because of the crisis nature of the whole global system. You havea to make sure that there is no kind of critical bottleneck that will crop up given this huge uncertainty, risk aversion, fears and so on. The central bank has to do that, and I am assuming that they (RBI) will do that," Virmani said.
Housing and auto sectors are few of the worst sufferers of the current economic slowdown. After recording around nine per cent growth for the last four years, the growth has slipped to 7.8 per cent in the first half of the current fiscal with fears of further slowdown.