India Inc on Thursday cheered RBI’s move to slash key interest rate by 25 basis points and hoped it would encourage banks to lower lending rates, thereby stimulating consumption and investment demand to boost economic growth.
“The 25 bps reduction in repo rate taken together with the shift in RBI’s stance from ‘calibrated tightening’ to a ‘neutral approach’, would go a long way in lifting sentiment among businesses,” CII president Rakesh Bharti Mittal said.
He said the rate cut was in the right direction, given that the inflation footprint had been benign for some time. “The resumption of rate easing cycle, which is anticipated to bring down banks’ lending rates, will provide a fillip to both consumption and investment demand,” Mittal said.
In the sixth bi-monthly monetary policy review on Thursday, RBI surprisingly reduced the repo rate by 0.25 per cent to 6.25 per cent. It also changed the policy stance to ‘neutral’ from the earlier ‘calibrated tightening’, signalling further softening on its approach to rates.
The central bank also cut its estimates on headline inflation, which cooled off to an 18-month low of 2.2 per cent in December, for the next year. It expects the inflation numbers to print in at 2.8 per cent in the March quarter, 3.2-3.4 per cent in first half of the next fiscal and 3.9 per cent in the third quarter of 2019-20.
As per Ficci, which had hoped for a larger cut in repo rate, the 25 bps reduction will be followed up with more such measures in the subsequent months. Ficci president Sandip Somany said the monetary policy should complement the fiscal policy and strengthen the growth impulses slowly building in the economy.
“This is important as we do not foresee much impetus coming from external sources of growth as the global economy continues to show signs of moderation. In such a scenario, all levers must be used to strengthen India’s domestic economy through greater consumption demand and investments,” Somany said.
Decision raises hopes for further easing,
say Experts
Bankers and financial experts said the RBI had created the much needed space to support financial activities by cutting the key repo rate by 0.25 per cent and raised hopes for further rate cuts.
The six-member Monetary Policy Committee’s decision to reduce the repo rate to 6.25 per cent will make home and other consumer loans cheaper as banks and FIs will free-up extra money for lending.
“MPC has clearly responded to the slack in financial markets in its credit policy. As the political cycle intensifies, monetary authorities have the onus to ensure financial sector stability and RBI seems to be focussed on it in deciding to cut the rates and complimenting it with other announcements regarding NBFCs credit assessment, raising limits for FPI for CP investments etc,” said Rajni Thakur, economist, RBL Bank.
There was a space created by lower headline inflation and the RBI has used that space to support financial activities. With lower projections of inflation and growth going forward, there are all indications that MPC will look for opportunities to cut further in the cycle if space is available, she said.
The apex bank has also changed the definition of bulk deposits from Rs 1 crore to Rs 2 crore and raised the collateral free farm loans to Rs 1.60 lakh from Rs 1 lakh earlier.
SBI managing director Dinesh Khara said these were two important decisions of today’s MPC meeting. On the farm-loan decision, Khara said it would go a long way in easing the credit availability for farmers.
“It will go a long way in terms of mitigating the hardships for farmers because very often, in certain places, it is heard that the farmers are unable to offer the collateral security. So in such cases, it (credit demand) will go up. Their (farmers) ability of raising money will go up. It will make the availability of loans easier for the farmers.
“I think these are two very important changes that have been announced in this policy. Bulk deposit have been increased... because earlier very often it was felt that it was not the level that we should start quoting, the preferred rates. So, I think the reasons are possibly this. But this is something, I think is more operational in nature and it will not have a much of an impact otherwise,” Khara said.
PropTiger.com said the industry was expecting a bigger rate cut than announced. It aid as headline inflation was way below target, MPC could have given 50 bps relaxation to industry.
“It would have helped accelerate sales growth in residential real estate which is a major contributor to economy. Change of stance to neutral is positive as it means we can look forward to future rate cuts,” said Ankur Dhawan, chief investment officer, PropTiger.com.
Pranjul Bhandari, chief India economist, HSBC, said the policy had opened up the space, however, one should not get carried away as doles announced in the Budget had to be watched carefully. Engineering Export Promotion Council of India (EEPC India) urged the RBI to ensure transmission in policy rate cut.