Soon after the Reserve Bank unveiled its mid-quarter review of the monetary policy, several bankers hinted that they may consider rate cut in their ALCO (Asset Liability Committee) meeting.
RBI Governor D Subbarao in the third quarter monetary policy review surprised the market by cutting short-term lending rate called repo by 0.25% to 7.75% and Cash Reserve Ratio (CRR) by similar margin to 4%, releasing Rs 18,000 crore primary liquidity into the system.
Shyam Srinivasan, Managing Director & CEO, Federal Bank said:
Today’s rate cuts make India become the first major Asian economy to ease borrowing costs in 2013. This along with finance ministry commitment to keep Current Account Deficit at 4.8 percent will induce confidence in directing increased credit flows towards productive investments.
In its report [report on Macroeconomic and Monetary Developments – Third quarter review 2012-13] issued on the eve of the policy announcements, RBI said “Given the preponderance of non-monetary factors behind the current slowdown in an environment where risks from high inflation, current account and fiscal deficits still remain, the scope for supportive monetary policy action is constrained”. In the backdrop of what was stated in third quarter review 2012-13, it is a heartening development.
With investor sentiment slowly turning positive amidst stagnant growth, India is going through an extended slow down in Industry and trade during the last many months with GDP growth rate at a ten year low. Against this background, the cut in repo rates and CRR is progressive indeed. I would have preferred an even larger cut in CRR, as it could have delivered a significant multiplier effect on liquidity and could have made transmission of rates a lot easier.
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This set of rate reductions speak of RBI’s confidence that the current account deficit, fiscal deficit and other factors which it has been concerned so far would be contained by the progress in fiscal consolidation by Government of India. RBI has expressed hope in its report that the government would stand by its commitment to the fiscal deficit target of 5.3% of the GDP.
The rate cuts should result in revival of industrial activity and capacity additions that have been on pause mode so far. It sends the right signals and should encourage investments and result in enhanced credit flows. The monetary measures coupled with steps taken by the Government to rein in fiscal deficit augur well for the economy and should lay the strong foundation of sustained growth over the next few years.
Commenting on RBI's action, SBI Managing Director A Krishna Kumar said "a rate cut is likely. Rates on advances and deposits could come down simultaneously. The RBI's action is positive".
Indian Overseas Bank executive director A K Bansal said the RBI's action will result in moderation of interest rates in the coming days.
Both lending and deposit rates are expected to see a downward revision, which will improve growth prospects, he said.
According to Canara Bank executive director A K Gupta, the bank would consider interest rate cut in the light of RBI policy action.
Echoing similar views, Bank of India executive director N Seshadari said most of the banks are likely to transfer the rate cut.
"Full transmission will happen on both lending and deposit rates. A 0.25% cut is most likely."
Kotak Mahindra Bank chief economist Indranil Pan said RBI delivered a very balanced policy.
"As expected, they chose the calibrated path of a 25 basis points cut in the repo and the reverse repo rates. They wanted to avoid a repeat of April 2012 when the RBI had cut the repo rate by 50 basis points and then had to pause with surprises creeping in from the inflation side," he said.