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The central bank decision to suck out liquidity from the banking system to defend the rupee has made banks' cost of funds dearer, as short-term rates have begun increasing. However, the finance ministry has stepped in to ensure that public sector banks (PSBs) do not raise interest rates to pass on the rise in cost to customers.
According to a top PSB official, the ministry called banks to take stock and indicated the Reserve Bank's action was a temporary one, to be reversed when the rupee stabilised. "As a result, we should not tinker with interest rates; that was the impression," said a chairman and managing director of a large PSB.
Most large PSBs, including State Bank of India, Bank of Baroda, Union Bank of India, Bank of India and IDBI Bank, said they were not contemplating a rise in the lending rate.
On Monday night, the central bank decided to put a cap of Rs 75,000 crore on banks' borrowing from its daily liquidity adjustment facility and raised the marginal standing facility by 300 basis points above the repo rate, to 10.25 per cent. These take effect from Wednesday.
The steps, to drain out about Rs 30,000 crore from the system, equivalent to a 75 bps rise in banks' cash reserve ratio, was interpreted as a reversal of the easy money policy. In Jaipur on Tuesday, Finance Minister P Chidambaram said this was not the correct interpretation. "These measures should not be read as a prelude to any policy rate changes. These have nothing to do with policy rate changes," he stressed.
The move comes as PSBs had started to reduce their base rate (BR), the benchmark reference rate for all loans. At a meeting earlier this month, the minister reminded government banks that they should facilitate monetary transmission. Banks were reluctant to cut rates even after the 75 bps reduction of the repo rate since January. After the meeting, Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India and Central Bank of India decided to reduce their BR. They have done so by 25-30 bps. On Tuesday, Delhi-based Punjab & Sind Bank announced a 26 bps reduction in the BR, to 9.99 per cent.
