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The 25 basis points cut in repo rate done by the apex bank Reserve Bank of India (RBI) in its mid-quarter review of the monetary policy today has brought cheer to the beleaguered corporate sector.
With today's cut companies are hoping for the investment cycle to begin once again, primarily in the infrastructure sector paving the way for a positive mood ahead. However, the RBI has also stated that more such rate cuts will be a challenge.
The repo rate now stands revised at 7.5% with the RBI shooting a warning that "the headroom for further monetary easing remains quite limited.” The apex bank kept the CRR and the reverse repo rate unchanged today.
Hemant Kanoria, Chairman and Managing Director, Srei Infrastructure Finance, said, "The 25 basis point cut in the policy rates was on expected lines. At this juncture, a fillip to industrial growth is imperative in order to keep the growth engine running. Thus, the policy rate cut is very timely. Hopefully, today's move, along with the announcements made in the Union Budget, will re-start the investment cycle in infrastructure. India is likely to register a much better growth rate in the next fiscal."
The rate cut has brought hope to the ailing automotive industry as at least 70% of car sales depend on vehicle finances for purchase in India. Car making companies are hoping that today's cut will allow banks to reduce their interest rates on vehicle loans.
Sandeep Singh, deputy managing director (sales and marketing) and chief operating officer, Toyota Kirloskar Motors said, "We welcome it (the rate cut) and feel its a step towards positive direction".
In February the car industry witnessed its worst monthly fall in 12 years with sales plunging nearly 26% as customers held back purchases due to a variety of reasons ranging from high fuel costs, to costly lending rates to general inflation.
V S Parthasarathy, Group CIO, EVP-Group M&A, Finance & Accounts, Member of the Group Executive Board, Mahindra & Mahindra, “It is a welcome step by RBI. By acting on the Rate front , the RBI has mitigated the negative impact of no action, as markets have widely expected and priced the cut. The cut in Repo Rate action is a vote for kindling the investment sentiment from RBI’s side, though the immediate benefit will reflect in the short term rates."
Companies though are not too worried about the RBI warning on the limited headroom for further cuts.
"RBI did indicate the “limited “ head room for further monetary easing but the stance does not take away the assurance of a stability of interest rate regime or further accommodative stance in case of evidence of inflation moderation", added Parthasarathy.
Market watchers however have a rather optimistic view of the near future.
Amar Ambani, Head of Research, India Infoline Limited, said, "In our view, the Central Bank is likely to cut the repo rate by further 25 basis points only in the remainder of 2013. Key risks to our view would be material moderation in food inflation in second half of the year and constructive steps by the government to reinvigorate private investments and reduce the Current Account Deficit. We expect RBI to keep rate unchanged in the annual monetary policy review on May 3.”
