With the downward trend of price rise and recent good gross domestic product (GDP) numbers, banking regulator Reserve Bank of India (RBI) is all set to meet the Government’s expectations in its quarterly monetary policy review on Tuesday. In order to stimulate the country’s economy, India Inc expects 25-50 basis point rate cut from the central bank, while the banking sector is hopeful for a favourable move by the RBI for them to check the bad loan growth movement and achieve a greater lending target to their businesses.
“The central bank is now quite confident that inflation is under control and it may cut its key rates to give a boost to the industrial growth. After the good GDP numbers, the Government is also very aggressive to take measures in this connection,” sources in RBI told The Pioneer on Sunday. “Besides, there are other surprises to come up on Tuesday from the RBI to help grow the banking sector as well,” sources added without divulging the details about it.
The Government has been pitching the RBI to cut rates further, setting a target of bringing the inflation consistently below 6 per cent by January next year. Finance Minister Arun Jaitley recently said that the fourth quarter (January- March) GDP growth of 7.5 per cent and 7.3 per cent for the entire financial year 2014-15 indicate that the economy is in ‘recovery mode’.
As far as the banking sector’s asset quality is concerned, it has further worsened in the last one year, with bad loan growth or gross non-performing asset (GNPA) ratio inching to 4.45 per cent as on March 15 this year, as compared to 4.1 per cent in March 2014, according to the RBI data. “There is a need to check this unacceptable movement which has been not only a concern for banking sector, but also for the Government. The central bank is working on it with its proper mechanism to bring it down in due course of time,” added the source.
Recently, RBI Governor Raghuram Rajan met the Finance Minister and discussed about the various measures which will be taken shortly to clear all stumble-blocks in the banking sector. However, bankers are of view that the RBI will snip rates again at its next meeting on June 2 in a bid to encourage lending to get significant credit offtake in their businesses. “We do expect at least 25-bps rate cut by the RBI in its forthcoming policy review. As inflation, it seems, is kept under check, the credit offtake is still not happening as per our aspiration for a simple reason that being it the first quarter we don’t see much credit taking place as it happens mostly in the last quarter only,” a banker said.
Rajan had lowered its policy rate twice since January 2015, but maintained status quo its last policy review on April 7 in the wake of the possibility of unseasonal rains and hailstorm impacting food prices. The repo, the rate at which the RBI lends to banks, stands at 7.5 per cent now. Keeping inflation in view, in April consumer prices fell to a four-month low of 4.87 per cent, well within the RBI’s target range. last week, Economic Advisor Arvind Subramanian suggested that it had ‘implications for interest rates’. Citing low inflation and fiscal deficit numbers, Subramanian also pitched for a rate cut by the central bank in its monetary policy review meeting. As far as corporates are concerned, industry giants also want rate cut upto 50 bps to boost their business growth. FICCI’s business confidence surveys indicate that firms are still apprehensive about undertaking fresh investments. “Inflation, which was a major concern factor, has been on downward trajectory. We hope that the RBI will cut the repo rate by 50 bps on June review.”
To support their views, Commerce and Industry Minister Nirmala Sitharaman on Saturday said, “Even if it is not cheap credit, I would strongly push for an affordable credit available for Indian industry only then the revival be (happen).” In a note submitted to Rajan, Assocham Secretary General DS Rawat pointed out that the Consumer Price Index (CPI) inflation was expected to be in a range of 4.5-6 per cent over the remainder of 2015. Based on the RBI’s view, the real interest rate should be around 150-200 basis points. “Thus, we anticipate a 50 bps reduction in the repo rate over the remainder of this calendar year, while 25 bps should be announced right away,” Rawat said.