Pratip Chaudhuri
Chairman, State Bank of India
There will be monetary transmission, following the rate cut. The transmission of the last CRR cut could not happen fully, as we thought to wait until the policy and do a comprehensive cut in the lending rates. It will not happen across the board. It will be specific to segments where the mark-up of the base rate is significantly high. So, in our case, it will be largely for the SME sector.
Credit absorption will happen in consumer banking, especially the auto loans. Farmers, after harvest, today need a lot of credit. On the corporate side, public sector companies that are generally capital-intensive will roll out their investment plans and that will absorb a lot of credit. So, credit growth looks achievable. But, I will be genuinely concerned about deposit growth. Bank deposits are getting crowded out by other competing savings products, not only because their pricing is better but also because their tax treatment is superior.
Keki Mistry
Vice-Chairman & CEO, HDFC
After a neutral monetary policy stance since October 2011, the RBI’s announcement of a 50-basis-point reduction in the repo rate will certainly bring cheer to the markets.
However, given that RBI is still apprehensive on inflation and has been very vocal on its concerns regarding the fiscal and current account deficits, the markets should not anticipate too many further rate cuts in the months ahead. Clearly, the deceleration in GDP growth to 6.1 per cent in the third quarter of FY12, along with the continued weak IIP data, has prompted this decision.
One hopes these measures will quickly translate into a reduction in the cost of funds.
RBI’s decision to abolish prepayment penalties on floating-rate home loans now creates a level playing field between banks and housing finance companies.
Motilal Oswal
CMD, Motilal Oswal Financial Services
RBI has finally bitten the bullet. Its forward-looking projections of the economy were reassuring on the health of the domestic economy. The policy stance reflected reprioritisation in favour of growth, while remaining vigilant about inflation and liquidity. RBI also called for better policy coordination. These measures and utterances, decisive in their intent, come as a significant relief when imbroglio on the policy front has been widely held responsible for an uncertain economic environment.
RBI was, however, emphatic in highlighting risks to the economy. On balance, the guidance given for the future is mixed and reflects a dynamic approach to redress concerns. Understandably, RBI remains concerned, but not alarmist, about the inflationary situation. This raises the odds that monetary policy would be more interactive to the needs of domestic growth revival. Thus it’s time to hope again.
Sunil Kaushal
CEO, India & South Asia, Standard Chartered Bank
After focusing on inflation for the good part of the last two years, it is welcome to see the central bank create more room for growth. With a half-percentage-point cut in the repo rate, coupled with assurances of a comfortable liquidity environment, I do see credit costs easing, which is very good news for industry, as it will support investment spending. The focus on growth is important, as without a healthy underlying growth rate, tackling other issues that are intensifying and weighing on the economy — such as high government spending, subdued exports and the deterioration in the quality of banks’ lending portfolio — would be an uphill task.
Clearly, this policy is a step in the right direction and will improve sentiment. The onus for the next steps is now on banks and the industry. As some of the bigger banks cut deposit rates, lending rates will move southwards as well, which will push credit to stimulate a somewhat sluggish industry.
Rajeev Talwar
Group Executive Director, DLF
The 50-basis-point cut is a very welcome step. It will boost cash flows of industry players and give relief to buyers of homes. With signs of economic recovery and rate cut, one can expect better sales in the coming quarters. I believe that RBI has given signals that it is concerned about economic growth.
If you look beyond what RBI has done, the current set of economic problems can only be solved by government actions on disinvestment, reforms, better taxation and so on. Since food inflation still remains a major concern, the government should also focus on containing that. RBI is telling the government that we have done our bit, now you have to do yours.
I do not think we should predict right now that RBI will further cut rates or not. Policy actions should not swing like pendulum. Stability is hallmark of any policy action.
Stuart P Milne
Chief Executive Officer, HSBC India
Financial markets that had expected a repo rate cut of 25 basis points got a surprise when the Reserve Bank of India, in its Monetary Policy Statement today, announced a 50-basis-point repo rate cut.
Additionally, RBI also increased the amount banks could borrow under the Marginal Standing Facility (MSF) from one-two per cent of net demand and time liabilities and lowered the MSF rate to nine per cent from 9.5 per cent. There was an immediate market reaction, with government bond yields rallying 10-12 basis points and CD rates falling sharply.
With these actions, the RBI has, no doubt, provided an immediate boost to market sentiment that had been lagging for the last few months. We should see some impact of these lower rates on the banking system’s deposit and lending rates over the next few weeks.
This move is in response to the slowing down of GDP growth over the last few quarters, and a decline in core inflation. However, the RBI has clearly identified the risk of headline inflation spiking higher in the near term once the government passes on the higher cost of petroleum products to consumers. The RBI has nonetheless stressed the importance of passing on the impact of higher petroleum prices to consumers if the government is to contain subsidies within the cap of 2% of GDP as envisaged in the Union Budget. It has also cautioned that the scope for further monetary easing is currently limited by the upside risk to inflation, and would be further constrained by any slippage on the fiscal front.
