Throwing cold water on the fervent expectations of the market of an aggressive cut in interest rates, the Reserve Bank of India (RBI) on Friday reduced the repo rate by a mere 0.25 per cent and left the cash reserve ratio (CRR) unchanged.
From the common man’s perspective, the anti-climactic action by the RBI won’t have much of an impact on home loan EMIs as banks led by SBI were quick to indicate that it would be difficult to effect a cut in lending rates.
With the cut announced by RBI, resultantly the repo rate came down to 7.25 per cent, the lowest since May 2011, while the CRR remained the same at 4 per cent. Though there were high hopes of a 0.50 per cent cut in repo rate and even a reduction in CRR, the RBI had on Thursday itself indicated its cautious stand on any ambitious key rate cut in its Macroeconomic and Monetary Development report, saying that high retail inflation and widening current account deficit (CAD) may not make it possible.
The defensive step by the RBI left its impact on the markets and even rupee movement, both of which headed southwards. The BSE benchmark Sensex slumped by 160 points as RBI adopted a “hawkish” stance in its monetary policy 2013-14 overshadowing its 0.25 per cent cut in repo rate.
Similarly the rupee depreciated further by 13 paise to close at 53.94 against the dollar at the Interbank Foreign Exchange (Forex) market owing to weakness in local equities despite key rate cut by the RBI.
RBI Governor D Subbarao while unveiling the annual monetary policy pegged the growth rate for the current fiscal at a conservative level of 5.7 per cent saying, “economic activity during the current year is expected to show only a modest improvement over last year, with a pick-up likely only in the second half of the year.”
According to Subbarao, “the balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamics yields little space for further monetary easing”.
Describing the high Current Account Deficit (CAD) as “by far the biggest risk to the economy”, he said, “monetary policy will also have to remain alert to the risks on account of the CAD and its financing, which could warrant a swift reversal of the policy stance”.
Justifying the limited easing, Subbarao said “monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping public investment.”
The upside risks to inflation, which cooled to a three- year low in March, “still remain significant” in the near term on suppressed inflation on the energy front, Subbarao added.
The central bank expects inflation to hover broadly around the 5.5 per cent mark in the current fiscal and said it will deploy “all instruments at command” to bring it down to 5 per cent by March next year. The decision to leave the CRR unchanged seems to have been driven by an improvement in liquidity deficit, as the banks are now drawing around Rs 84,000 crore from the overnight window compared to Rs 1.8 lakh crore late last fiscal.
Reacting on RBI’s decision, Finance Minister P Chidambaram said, “it (RBI) also announced rather liberal OMO (Open Market Operations). If the inflation trend down further...That will decide scope for further policy action.”
Speaking on the impact of the rate cut on retail and corporate loans, SBI Chairman Pratip Chaudhuri said, “there is no scope (for a lending rate cut now).”
His views were shared by other bankers too who ruled out the possibility of rate cut in the immediate run. Chaudhuri has been calling for a 100 basis points cut in the banks’ CRR, which the Governor left unchanged at 4 per cent, for effective monetary policy transmission.
A cut in the CRR will help banks release their funds stuck with the RBI on which they do not get any interest from the regulator. ICICI Bank Chief Chanda Kochhar conceded that the rates in the certificate of deposits have been going down, but termed it as a cyclical phenomenon.
“The present downward movement in deposit rates will not be sustained. And a lending rate cut will depend only on the movement of cost of funds,” she said. Indicating towards liquidity tightness in the system, Aditya Puri of HDFC Bank said he does not see any impact on the cost of funds till the liquidity comes to a comfort level.
“The overnight borrowings need to come down to the comfort level of Rs 60,000 crore before we see a decline in the deposit rates,” Puri said.