Rajan relents, cuts interest rate
RBI scales down country's growth forecast to 7.4% in current fiscal
Mumbai, Sept 29: Springing a surprise, the Reserve Bank of India (RBI) on Tuesday cut its short-term lending rate by 50 basis points, but made a pitch for passing it on to consumers in the form of cheaper persol and commercial credit. Stakeholders expected a 25-basis-point cut.
Soon after the rate cut announcement, the country’s largest lender, the State Bank of India (SBI), said it will cut its base rate by 40 basis points effective October. A similar indication was given by some other banks, notably ICICI Bank.
As per Tuesday’s decisions, the repurchase rate, or the interest charged on short-term borrowings, was cut to 6.75 percent. But it is clear that it will take commercial banks to lower their own lending rates for persol, automobile, housing and corporate loans to also get reduced, translating into lower EMIs.
The indexed reverse repo rate, or the interest payable by the central bank on short-term deposit, automatically stood reduced to 5.75 percent. There was no cut in the 4 percent cash reserve ratio that banks have to maintain in the form of liquid assets and desigted government securities.
“Markets have transmitted Reserve Bank’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent,” Reserve Bank Governor Raghuram Rajan said in the fourth bi-monthly monetary policy statement for the current fiscal year.
“Median base lending rates of banks have fallen by only about 30 basis points, despite extremely easy liquidity conditions,” the Rajan said, adding “This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank. Bank deposit rates have, however, been reduced significantly, suggesting further transmission is possible.”
The RBI Governor also made some significant announcements, which boosted the market mood.
The limits for foreign funds’ investment in Central government securities will be increased in phases to 5 percent of the outstanding stock by March 2018. This will make additiol room for investment of Rs.1,200 billion, over and above the existing limit of Rs.1,535 billion.
This apart, Indian corporates will be permitted to issue rupee-denomited bonds with a minimum maturity of five years in overseas locations within the ceiling of foreign investment permitted in corporate debt — set at $51 billion at present.
“There shall be no restriction on the end use of funds except a small negative list,” he said.
The markets were elated. The sensitive index (Sensex) of the Bombay Stock Exchange (BSE) Nifty of the tiol Stock Exchange (NSE) that had opened sharply lower on Tuesday morning, closed the day’s trade with gains of little over 0.60 percent each.
India Inc. was also elated by the unexpected quantum of rate cut. All three apex chambers — Assocham, FICCI and CII — welcomed the decision, but hoped commercial banks will transmit the policy decisions, lowering the cost of credit for them.
Going into growth and prices, Rajan’s assessment was mixed.
“Since our last review, the bulk of our conditions for further accommodation have been met. The January 2016 target of 6-percent inflation is likely to be achieved,” he said, but was worried over growth — and wanted structural reforms and corporate actions to address this issue.
“Furthermore, investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow,” he said about the central bank’s own contribution to lift economic activity in the country.
The RBI also scaled down its earlier estimate of the country’s GDP growth for the current fiscal to 7.4 per cent from 7.6 per cent. It cited lack of new private investment, banks’ stressed assets and waning business confidence as reasons for this revision.
“Underlying economic activity, however, remains weak on account of the sustained decline in exports, rainfall deficiency and weaker than expected momentum in industrial production and investment activity,” Rajan cautioned.
There was pressure this time on the central bank to cut rates from all stakeholders, including a veiled nudge from government functiories, especially since India’s growth has been floundering and inflation and the pressure on the price line has been seemingly under control and declining.
Going forward, too, Rajan was supportive of India Inc’s pleas.
“While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed,” he said.
“The Reserve Bank will continue to be vigilant for signs that monetary policy adjustments are needed to keep the economy on the target disinflatiory path.”
The central bank had last eased lending rates during its review in June. That time it cut the repo rate 7.5 percent to 7.25. Accordingly, the reserve repo rate also stood cut by an equal margin.
June also saw the the third repo rate cut this calendar year, after a 25-basis-point cut each in January and March. In the case of cash reserve ratio the monetary authority has been maintaining status-quo, leaving it unchanged at 4 percent since 2013.
The statutory liquidity ratio was brought down by 50 basis points to 21.5 percent in February this year.