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Monetary Policy Review

Reaction from Harsh Roongta, CEO, Apna Paisa Pvt. Ltd. on the policy move

Harsh Roongta

22 Apr 2009

As part of its Annual Policy Statement for the financial year 2009-10, the Reserve Bank of India (RBI) cut repo and reverse repo rates by 25 basis points (0.25%) each. The repo is the rate at which the RBI lends to banks while the reverse repo is the opposite. Post the cut, the repo rate now stands at 4.75% while the reverse repo rate stands at 3.25%. The cash reserve ratio (CRR) remains unchanged.


Reaction from Harsh Roongta, CEO, Apna Paisa Pvt. Ltd. on the policy move


In today's monetary policy review, RBI has once again dropped the Repo and Reverse repo rates by 25 basis points (0.25%). This was a mild surprise since a rate cut was not widely expected. Nonetheless, RBI has done significant rate cuts over the last six months, which has only partially impacted the interest rates on deposits and lending. The real constraint to a further reduction of interest rates by the banks are their long term deposit rates which compete with the government run (and guaranteed) small savings schemes. With 5 years Post Office deposits paying 7.5 %, PPF @ 8%, whereas NSC rates and Post Office MIS rates being 8% + and senior citizens scheme at 9% the small investor will clearly shift to these schemes if banks drop interest rates below these schemes. This creates a floor below which banks FD rates cannot drop. And when banks fixed deposit rates cannot drop, it is clear then lending rates can also not drop. So clearly till these administered rates are brought down we are unlikely to see any significant changes in interest rates (both deposit and loans). We will have to wait for the new Government to come in to change the administered rates on various small saving schemes.