'RBI should not cut repo rate'


Even as the savings bank interest rate is the only deposit rate regulated by the apex bank, Tarapore pointed out a more specific aspect is the harshness relating to the interest on saving bank accounts. When deposit and lending rates, he elaborated, were on the decline a few years ago RBI had no hesitation in gradually slashing the savings bank deposit rate. But subsequently, when the overall structure of interest rates rose, RBI took no action to raise the savings bank deposit rate. He felt that it should be recognised that the bulk of savings bank accounts are held by people of modest means and such accounts predominate in semi-urban and rural areas and the way the savings bank interest rate has been operated reflects insensitivity to the mass of small savers.

Again, the authorities are excessively swayed by the concerns of banks that raising the savings bank deposits rate will hit their profitability, said he and pointed out that in a dynamic system banks would be able to raise more resources at lower interest rates. 

Furthermore, Tarapore said RBI should not cut its repo and cash reserve ratio (CRR) in its July monetary policy and force banks to lower their interest rates.  While political economy considerations may prevent the RBI from giving an unequivocal signal of monetary policy tightening, it certainly should not reduce the present repo rate of 4.75 per cent, said he.    

Like interest rates, the time has come to no longer talk about possible reduction in the five per cent CRR but give a clear signal that the CRR may need to be raised in future, according to him. He also said the apex bank should refrain from forcing banks to lower their lending and deposit rates as further reduction in rates would discourage depositors.

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