No cut for now in home, consumer loans as wary RBI doesn’t tinker with rates

Ignoring the general expectations, the RBI, in its third quarter review of monetary policy, has chosen to focus on liquidity management, money supply growth and potential inflation.

“The US Fed cut the rates after considering the domestic factors in the US. Here in India, we have looked at the domestic factors and decided to keep the rates unchanged,” said RBI Governor Y V Reddy after unveiling the policy in Mumbai.

The central bank kept the benchmark Bank Rate — the rate at which the RBI lends to commercial banks — unchanged at 6 per cent. It also decided to keep key short term rates steady — repo (the rate at which the RBI infuses liquidity into the system) and reverse repo (the rate at which the RBI sucks out excess liquidity) unchanged at 7.75 and 6 per cent respectively. It also kept the cash reserve ratio — the portion of deposits that banks have to keep with the RBI — steady at 7.5 per cent.

Reddy said inflationary risks were prevailing in the system. There is plenty of liquidity in the system. Besides, the rise in international oil prices has not been passed on to the domestic consumers so far. When that happens, it could result in a rise in inflation.

However, bankers are not ruling out a cut in interest rates in the not so distant future. “As of now, we have not decided on the rates but we are watching the developments in the money markets closely and would take a decision shortly,” said Renu Sud Karnad, Joint Managing Director, HDFC.

“We are cautiously watching the scenario and will maintain status quo on rates. Although we are happy with the current 22 per cent credit growth of our bank, we are not averse to any change in the interest rates in future if the need arises,” said Chanda Kochhar, joint managing director, ICICI Bank.

Reddy said the emphasis is on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment conducive to continuation of the growth momentum and orderly conditions in financial markets.

“International financial markets remain volatile and uncertainties about US sub-prime mortgage market and other credit markets remain. Against this background and factoring in domestic factors like some weakness in manufacturing activity, slowing growth in core sectors and underlying inflationary expectations, the RBI has adopted a cautious stance,” said O P Bhatt, chairman of SBI, India’s largest bank.

Others were disappointed. “We continue to believe that the Indian rate cycle is peaking off, although the RBI did disappoint on our expectation of a 25 bps repo rate cut. This reflects a steady normalisation of credit offtake with a soft landing of the Indian economy,” said Indranil Sengupta, Economist, DSP Merrill Lynch.

The RBI explicitly recognised risks from global developments and that monetary policy has become more complex. “In our view, this signals a nuanced change in stance from a hawkish concern about inflation only, to giving some weight to the risks to growth. This reinforces our view that interest rates have peaked and we expect the RBI to cut rates during the next policy meeting in April. Banks will gradually start lowering deposit rates taking the cue from the RBI’s policy statement,” said Tushar Poddar, Vice-President, Asia Economic Research, Goldman Sachs.

In the policy, the central bank stuck to its projection of economic growth at 8.5 per cent, while declaring that the policy mechanism would endeavour to contain inflation rate close to five per cent in the current financial year.

Reddy doesn’t cut, inflation on his mind

• No change in bank rate, CRR, repo rate and reverse repo rate

• Domestic factors weighed heavily in leaving rates steady

• Says inflationary risks remain in the system

• Bankers don’t see any immediate reduction in interest rates