Kalpana Morparia,
CEO, J P Morgan India
With the banking system flush with liquidity, the transmission of the rate cuts to lower deposit and lending rates could help revive the credit flow
Extending the host of measures taken to support economic growth, the RBI lowered the repo and reverse repo rate by 25 bps. Having said that, the comprehensiveness and the clarity imbibed in the policy statement was well appreciated by the market participants.
Recognising the downside risks to growth emanating from weak global demand as well as tight financial conditions, the central bank has rightly focused towards lowering the policy rates.
However, despite the sharp reduction in the policy rates, the policy transmission remained sticky. But with the banking system having been flush with liquidity, which has increased sharply since end-March, the transmission of the rate cuts to lower deposit and lending rates could help revive the credit flow.
In addition, the continued monetary easing stance provides the banking system with the assurance that, in case of another liquidity crunch, the cost of acquiring short-term liquidity would remain low.
The cut in the reverse repo rate is also significant from an operational angle. It was widely believed that it would be highly challenging for the central bank to lower the reverse repo rate below the administered savings rate of 3.5 per cent, as it would affect the profitability of the banks. Today’s move has belied speculations suggesting that any further reduction in the reverse repo rate (from the existing 3.5 per cent) would have to be accompanied by a concomitant reduction in the savings rate.
The administered rate could be lowered in the coming months, but this is unlikely to be a binding constraint for further rate cuts. In addition, the RBI’s decision to allow the scheduled commercial banks to set up offsite ATMs without prior approval is a welcome announcement.
The delay in opening up the domestic banking system for foreign banks, though disappointing, is understandable considering global market conditions and strains in the financial sector.
