Fading star needs to shine
S K MITRA
Director, Financial Services, AV Birla Group
The bank rate, under different names, is used by authorities abroad as the principal tool for controlling and measuring money supply and to signal the interest rate and monetary policy stance.
In the US, for instance, the Fed rate is a powerful instrument with which the Federal Reserve regulates money supply and monetary policies.
In India, however, there are multiplicity of rates and regulators.
The Reserve Bank of India (RBI) uses the bank rate for deciding the refinance rate to banks and primary dealers (PDs).
On the other hand, in the recent years the repo rate has become more relevant in view of ample liquidity and lower call money rates, due to which banks and PDs do not avail of RBI refinance to a significant extent.
With the call money rate prevailing below 5 per cent (which is the repo rate now) and bank rate fixed at 6.25 per cent, the importance of bank rate has obviously diminished.
In my view, more than the question of the relevance of bank rate, the situation is symbolic of the distortion of interest rate structure and its management in our economy.
First, RBI plays the dual role of the monetary authority and the banking regulator. Thus, its decisions are sometimes impaired by the needs of the banking industry.
On the other hand, various government agencies, including even the labour ministry, has influence on rates used for small savings, provident funds and other subsidised, tax efficient instruments.
Further, there has been significant rigidity in setting prime lending rates in relation to the market realities, particularly in case of the public sector banks, which constitute an overwhelming majority of the banking industry.
Thus, prime-lending rate has also lost its significance. Banks and market players have been using repo or LAF (liquidity adjustment facility) for meeting their borrowing needs.
These two rates are generally linked to the bank rate. On the other hand, the government uses treasury bills yields as benchmark for floating rate government securities, whereas corporates use the same benchmark for fixing bond rates.
The distortion of the market is thus reflected in the fact that while the bank rate, which is supposed to be used for overnight borrowings by banks, is fixed at 6.25 per cent, the 10-year gilt yield has dropped well below 6 per cent.
This highlights there is enough room for a reduction in the bank rate and rationalisation of other rates.
It seems that the RBI does give greater importance to the bank rate from the policy angle.
This is perhaps why it has been bringing down repo rate and the cash reserve ratio rate more frequently than the bank rate.
For the development of the yield curve and clarity in the overall rate structure, it is important to bring the bank rate back into relevance
