* Short term lending rate (repo) lowered by 0.50% to 8%
* Cash reserve ratio (CRR) retained at 4.75%
* GDP growth for 2012-13 projected at 7.3%
* March-end,2012-13 inflation expected at 6.5%
* Bank rate cut by 0.50% to 9%
* Deposit growth pegged at 16%,credit growth at 17%
* Upside risk to fiscal deficit target of 5.1%
* Govt borrowing may decrease credit flow to pvt sector
* Liquidity conditions moving towards comfort zone
* To issue final guidelines on Basel III by May 2012
* Tightens norms for lending against gold by NBFCs
* Next mid-quarterly monetary review on June 18.
In a surprise decision,the Reserve Bank today cut the benchmark interest rate for first time in three years by 0.5 per cent to provide relief to borrowers and revive the sagging economic growth.
Unveiling the annual credit policy here,the RBI reduced the short-term lending (Repo) rates to eight per cent from 8.5 per cent.Bank rate is cut to nine per cent from 9.5 per cent.
Banks,led by the State Bank of India,immediately announced they would substantially cut the lending rates that would benefit auto,home and personal loan borrowers.
However,it may not be a good news for depositors,who will earn lesser interest rates.
“The reduction in the repo rate is based on an assessment of growth having slowed …which in turn,is contributing to moderation in core inflation,RBI Governor D Subbarao said.
But,he cautioned,in view of persisting upside risks to inflation,it may not be possible to cut rates further.
SBI Chairman Pratip Chaudhury said his bank would “do a comprehensive cut” in lending rates. Asked if there will be substantial reduction in interest rates,he said,”Yes it will be. “Several other banks too said they would go in for the rate cuts and reduce deposit rates.
Besides,the RBI has directed the banks not to insist on a minimum balance on saving bank accounts,and not to levy charges on prepayment of loans.
Finance Minister Pranab Mukherjee said the RBI policy would boost investment sentiment. The government will take more steps in this direction,he added.
In its macro-economic assessment,the RBI projected the economic growth rate of 7.3 per cent and expects inflation to be 6.5 per cent by March,2013.
The industry and the stock market,which was expecting 0.25 per cent cut in the RBI interest rates,welcomed surprise decision.
Following the policy announcement,the BSE Sensex gained 207 points to close at 17,358 on widespread buying after RBI opted for bigger-than-expected rate cut.
Besides reducing interest rate,the RBI has also done away with pre-payment charges on home loan taken on floating rate of interest and tightened the norms for bank lending to gold finance companies. It kept the Cash Reserve Ratio (CRR),the amount which banks are required to keep in cash with the central bank,at 4.75 per cent.
On the impact of the policy on interest rates,Canara Bank Executive Director A K Gupta said,”the RBI has taken a bold step. The reduction in the policy rate by RBI would translate into lowering of interest rates. Base rates are expected to come down by about 25 basis points”.
IDBI Bank Executive Director R K Bansal said the monetary action will help boost growth and RBI has given a strong message to cut interest rates.
According to Indian Overseas Bank Executive Director A K Bansal,both deposit and advances rates would come down.
The likely cut in interest rates by banks will have positive implications for car and real estate companies which expect improvement in demand.
Describing the RBI’s decision as “good”,Maruti Suzuki India Managing Executive Officer Marketing and Sales Mayank Pareek said: “It will spur growth. I hope that banks will reduce lending rates. This should be good for auto industry.”
Expressing similar views,Honda Siel Cars India Senior Vice-President (Marketing) Jnaneshwar Sen said: “Now we are waiting for the banks to pass on this benefit to customers. If banks cut interest rates on car loans,it will definitely spur growth in the market.”
India Inc also welcomed the RBI rate cut saying it would boost investments in the country.
“The repo rate cut will provide the boost to investment as well as send a strong signal that turning around growth is of pivotal importance,” CII Director General Chandrajit Banerjee said.
ICICI Bank Managing Director & CEO Chanda Kochhar said,”This would ease the interest costs of the corporate sector,as also give a boost to retail demand”.
According to Finance Minister Pranab Mukherjee,”the monetary policy announcements should help in investment revival and contribute to strengthening of business sentiments. In the coming weeks we will take some additional steps to further reinforce focus on growth.”
Pointing to hardening of inflation,he said,”this is a cause for some concern. We intent to continuously monitor the situation and take the required steps to manage the short term supply constraint for those food items which contribute inflation.”
Pointing out that there is upside risk to inflation,the RBI said there is a need to check subsidies and raise prices of administered petroleum products to arrest fiscal slippages.
“Overall from the perspective of vulnerabilities emerging from the fiscal and current account deficits,it is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production,” it said
While petrol prices are market-linked,the government fixes the rates of LPG,kerosene and diesel,which results in a large budgetary expenditure on subsidies.
During the fiscal,RBI expects credit to grow by 17 per cent,and deposits by 16 per cent.
NITESH RANJAN,CHIEF ECONOMIST,UNION BANK,MUMBAI
A very bold step indicating RBI’s change in stance. This will help in arresting growth going below the trend level. One can expect the cost of fund and capital going down,which will encourage consumption and investment demand.
Given the inflationary risks,as mentioned in its (RBI’s) macro report,I think the next rate action may wait till first quarter review in July,by when more clear trend on growth and inflation will emerge.
VIVEK RAJPAL,INDIA RATE STRATEGIST,NOMURA,MUMBAI
The RBI seems to have largely front-loaded its rate cut plan and the language and outlook is not as dovish as should be with a 50 bps rate reduction.
The RBI has indicated its willingness to cut CRR further in case liquidity worsens but as far as further rate cuts are concerned the hurdle seems higher and we might see it only at next quarterly policy review.
GAURAV KAPUR,SENIOR ECONOMIST,ROYAL BANK OF SCOTLAND NV,MUMBAI
I think perhaps another 25 basis points in the first half of this year is likely. I think the room for further cuts is limited. The actual action is to support growth without taking eyes off inflation.
One comfort factor for the RBI is core inflation,which has fallen below 5 percent,which shows the demand side pressures are easing.
DEVEN CHOKSEY,MANAGING DIRECTOR,K R CHOKSEY SECURITIES,MUMBAI
The RBI has taken a practical approach. This should help banks improve credit offtake,bring down pressure on non-performing assets and even the impact on banks’ bond portfolios would be favourable.
Going forward one should expect some CRR cuts.
SUBBARAO AMARTHALURU,GROUP CHIEF FINANCIAL OFFICER,GMR INFRASTRUCTURE LTD,MUMBAI
This is a music to our ears,we have been waiting to hear such kind of a move for a long time. On the whole it is a good move and will fuel growth,provided inflation stays tamed. I think this is the beginning.
D.S. KULKARNI,CHAIRMAN,DS KULKARNI DEVELOPERS,PUNE
There won’t be much positive impact on real estate sector where pricing of houses are so high that cut in interest rates won’t make homes affordable … hence,sales will remain muted.
JAGANNADHAM THUNUGUNTLA,HEAD OF RESEARCH,SMC GLOBAL SECURITIES,NEW DELHI
The move is quite aggressive than what some market people were expecting. Now,we will have to see if the banks will pass on this cut as aggressively to industry. The central bank seems to be fairly comfortable with the liquidity situation,and is now shifting towards providing some stimulus to the economy.
R.K. GUPTA,MANAGING DIRECTOR,TAURUS MUTUAL FUND,NEW DELHI
I see it (the interest rate cut) as more of a sentiment booster … June-quarter results of companies will see some benefit. The rate cut should help interest rate-sensitive sectors like autos and real estate.
SAUGATA BHATTACHARYA,ECONOMIST,AXIS BANK,MUMBAI
It is a positive signal despite the hawkish stance. Given the RBI’s rate action today and its projection of economic indicators,I think they will cut the repo rate by a total of 100 basis points in fiscal 2012/13.
DEVENDRA PANT,DIRECTOR – PUBLIC FINANCE,FITCH RATINGS,NEW DELHI
It is apparent that the central bank’s main concern is more on the growth side rather than inflation,and this surprise cut is certainly in order to give a fillip or a boost to growth. But it is aggressive compared to what the market was expecting.
The government has made it clear that growth should not slump below what level is at now,and there was a need to ease monetary policy.
We are going to see bonds react positively and yields will fall,which will benefit pricing for the national borrowing and debt.
The rate cut is bigger than expected,and the guidance is important that RBI is indicating that there is limit for further rate cut expectation,and I think they are pretty much done with further rate cuts this year.
RUPA REGE NITSURE,CHIEF ECONOMIST,BANK OF BARODA,MUMBAI
I think this is a very prudent policy,and this will definitely pressurise banks to revisit lending rates. RBI has front-loaded rate cuts. We will see banks lowering the borrowing costs either by adjusting spreads or by reducing BPLR (Benchmark Prime Lending Rates) and base rate.
I am not seeing significant reduction in bond yields and the 10-year can be around 8.25 percent,because they also have hiked the limit on MSF (Marginal Standing Facility) and that will provide liquidity comfort.
DARIUSZ KOWALCZYK,SENIOR ECONOMIST AND STRATEGIST,CREDIT AGRICOLE CIB,HONG KONG
The reduction was bigger than expected and shows a strong shift of focus towards supporting growth,whose stabilization was described as a goal of the easing.
The RBI said that rate cut room is limited,and we see at least 25 bps more this year.
NIRAV DALAL,PRESIDENT AND MANAGING DIRECTOR,DEBT CAPITAL MARKETS,YES BANK,MUMBAI:
It is a little bit of a surprise. When you look at it objectively,25 basis points would have been a token. I think rate cut expectation will remain very,very contained and a lot will depend on growth and inflation numbers. Based on the current and evolving environment,to expect significant rate cuts in the remaining year might not be possible.
I would expect the 10-year yield to stabilise somewhere in 8.25-8.50 percent range in the near term.
JONATHAN CAVENAGH,FX STRATEGIST,WESTPAC,SINGAPORE
RBI decision – more than expected,market was looking for 25 bps cut. INR has rallied initially (due to greater support to growth from RBI,Indian equities have gone bid) but the comment that further room to cut rates is limited may limit INR gains.
Yesterday we had an upside surprise on inflation data and positive revisions to previous months,which will be very much at the forefront of RBI thinking in terms of determining how far they should cut rates.
The main share index extended gains to more than 1 percent after the rate cut.
Bond yields and overnight indexed swap rates fell after the policy review.
– The wholesale price index (WPI),India’s main inflation indicator,rose an annual 6.89 percent in March,higher than 6.70 percent rise estimated by analysts. Higher food prices offset a softening manufacturing data,thereby pushing the number above consensus.
– The Reserve Bank of India cut the cash reserve ratio requirement for banks by 75 basis points to 4.75 percent on March 9,sooner and more sharply than expected to ease tight liquidity. Before this it had cut the CRR by 50 basis points in January.
– Production at factories,mines and utilities in February grew at a slower-than-expected pace of 4.11 percent,below the 6.6 percent estimated by analysts,weighed down by a contraction in output of consumer durable goods.
– Economic growth slowed to 6.1 percent in the three months to December. The government has forecast growth in the fiscal year that ended on March 31 to dip below 7 percent for the first time in three years.
– India’s trade deficit is seen widening to $185 billion in 2011/12 on higher crude import bill,which may worsen the country’s current account balance and further weaken the rupee.