after the RBI’s Monetary Policy review meeting in Mumbai on January 29
MUMBAI: After a long gap of 9 months, the Reserve Bank of India (RBI) has reduced the short-term lending rate by 0.25 per cent and decided to release Rs 18,000 crore of primary liquidity, a move that would lead to moderation in home, auto and corporate loans.
These initiatives are aimed at encouraging investments, supporting growth and anchoring inflationary expectations, RBI Governor D Subbarao said while unveiling the third quarter monetary policy review here.
Shedding its long hawkish monetary policy stance, the RBI cut short-term lending rate called repo by 0.25 per cent to 7.75 per cent and Cash Reserve Ratio (CRR) by similar margin to 4 per cent, releasing Rs 18,000 crore primary liquidity into the system.
Following the repo rate revision, the other policy rates like reverse repo, bank rate, and Marginal Standing Facility Rate too will come down by 0.25 per cent.
While repo rate cut will reduce the cost of borrowing for individuals and corporates, the reduction in CRR, which is the portion of deposits that banks have to park with RBI, would improve the availability of funds.
Soon after the policy announcement, several bankers hinted at cutting lending and deposit rates by as much as 0.25 per cent in the coming days.
Commenting on the policy action, Commerce and Industry Minister Anand Sharma said: “It is a positive step which will infuse liquidity and help in catalyzing growth.”
The RBI, however, has reduced the growth projections for the current financial year to 5.5 per cent from its earlier estimate of 5.8 per cent.
While stock markets initially cheered the move with the BSE Sensex moving up by 91 points, however, in the afternoon trade, the Sensex declined to 20,050, down by 54 points.
Industry chambers too gave a thumbs up to the RBI monetary action saying it will help in reviving the industrial growth.
On inflation, the RBI moderated the rate to 6.8 per cent for March-end from earlier projection of 7.5 per cent.
“The moderation in inflation conditions provides the opportunity for monetary policy to act in conjunction with fiscal and other measures to stem growth risks,” Subbarao said.
He praised government’s recent reform measures including liberalization of FDI in retail, deferment of GAAR and progressive deregulation of fuel prices saying these actions would “help engender stable macroeconomic conditions and return the economy to its high growth trajectory.”
Planning Commission Deputy Chairman Montek Singh Ahluwalia said the CRR cut will have impact on long term interest rates.
“I think this is the right thing to do at this point of time given that (the decline) in economy is beginning to bottom out,” he said.
Prime Minister’s Economic Advisory Council (PMEAC) Chairman C Rangarajan said: “RBI has taken a very balanced view. This will ensure that stimulus is provided to growth while continuing efforts to contain inflation. The RBI will cut rates if inflation behaves as per its projection.”
On the possible impact of the RBI’s decision on interest rates, SBI Chairman Pratip Chaudhuri said the bank will hold its Asset Liability Committee (ALCO) meeting to consider rate cut.
“There is a case for transmission after the RBI’s action,” said Punjab National Bank Chairman and Managing Director K R Kamath.
ICICI Bank Managing Director Chanda Kochhar said there will be positive impact on EMIs. “There would be a rate action on monthly loan repayment.” Echoing similar views, Canara Bank executive director A K Gupta said the bank would consider interest rate cut in the light of RBI policy action.
The repo rate, which was cut last in April 2012, stands revised at 7.75 per cent, while the liquidity infusing CRR stands at 4 per cent effective February 9. CRR was last reduced by 0.25 per cent in November 2012.
Inflation has been the prime inhibiting factor that has prevented the RBI from cutting repo rate in the last nine months.
However, during the period RBI undertook a host of liquidity infusing measures like a cut of 1.75 per cent in CRR, government bond buybacks and a one percentage point reduction in SLR.-PTI
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