Industry leaders on Tuesday welcomed the rate cut, saying it was a strong message and a positive signal from the central bank.
Commending the maiden monetary policy announced by the new governor under the aegis of the recently constituted Monetary Policy Committee (MPC), Chandrajit Banerjee, Director General, CII said that the 25 bps rate cut is very welcome by industry.
“We can very clearly see that in the growth-inflation trade-off, the RBI is favourably inclined towards promoting growth in the economy,” Banerjee said in a press release.
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The Reserve Bank of India (RBI) on Tuesday afternoon cut repo rate by 25 bps to 6.25 per cent. Reverse repo rate under the liquidity adjustment facility (LAF) stands at 5.75 per cent, and the marginal standing facility (MSF) and Bank Rate at 6.75 per cent. All six members of the monetary policy committee voted in favour of the repo rate cut.
In its policy statement, the central bank said that the decision of the montary policy committee was consistent with the accommodative stance of monetary policy. Retail inflation, which dropped to 5.05 per cent in August, is expected to be 5 per cent by March 2017, with upside risk.
Anuj Puri, Chairman & Country Head, Jones Lang LaSalle (JLL) India, said, this rate cut delivery has happened for the second time in the current financial year, although after one round of rate cut in April, the current one is delivered after no change in the June and August policies. This shows that the central bank remains cautious in its monetary policies and is carefully monitoring the overall economic scenario before taking steps.
Talking about the impact of the rate cut on the housing sector, he said, “The reason why housing sales have been sluggish is because of trust deficit between consumers and developers. Unless RERA and other pro-consumer policies come into play, buyers will continue to be wary. Therefore, we can expect only a marginal improvement in sentiment on the back of this rate cut. At this point, there is also no ready answer to the question of to what extent banks will actually pass on the benefit of the rate cut to borrowers”.
“Great relief is expected for the construction sector, as steel and cement production has been robust as seen from latest industry production data. Therefore, rising cost pressure which haunted developers earlier may not be a major issue in the near-term,” Puri said.
“However, for sentiments to witness a turnaround, stakeholders would continue to expect a sustained strengthening of the economic situation. RBI’s expectation of a 7.6% growth in the gross value addition is a positive one,” he added.
Bobby Parikh, Chief Mentor & Partner, BMR & Associates LLP, said, “With this rate reduction, the Reserve Bank has brought down the repo rate by 175 basis points January 2015. Along with the reduction in the policy rate, the RBI has maintained an easy liquidity stance. Both these factors, combined with the marginal cost based lending rate regime for banks, ought to translate into reduced costs of borrowings for companies and individuals”.
“In its Monetary Policy Report, the RBI notes that while a number of factors have contributed to a relatively benign inflation environment and the MPC envisages inflation to trend towards 5 per cent by March 2017, the MPC does note that there are risks of upward adjustments to this projection,” he added.
This is for the first time that decision-making on interest rates has shifted to the six-member panel which has equal representation from RBI and the government. Since January last year, the RBI has cut the repo-rate – the rate at which RBI lends to banks – five times.