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The Reserve Bank of India, in the mid-quarter review of its monetary policy, today lowered the repo rate by 25 basis points — the second time this year — but warned the scope for further easing was limited, as inflation was likely to stay at the current level next financial year, too.
Banks said there was no scope for an immediate cut in lending rates. In fact, Nomura called the move a “wasted precious bullet”, as banks were unlikely to pass the rate cut to consumers. SBI Chairman Pratip Chaudhury said the quantum of the cut was not enough and SBI would look at revising rates only next financial year.
While the reduction in the key policy rate, to 7.5 per cent, was on expected lines, RBI’s hawkish tone worried the markets. “Even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains limited,” RBI said, citing risks such as the increasing wedge between the retail and wholesale inflation rates and the high current account deficit.
The cash reserve ratio (CRR) — the proportion of deposits banks keep with RBI in cash — was left unchanged at four per cent but RBI did not disappoint the market in terms of liquidity infusion. After market hours, it announced Rs 10,000-crore bond purchases via open-market operations. Finance Minister P Chidambaram had yesterday hinted it would address the issue of high liquidity deficit.
From RBI’s repo facility, banks have been borrowing around Rs 1 lakh crore daily, higher than what the central bank aims to maintain.
Most market participants, however, see at least one more 25-bp rate cut when RBI announces its annual policy in May. “We see RBI following up today’s repo rate cut with another 25-bp cut in the annual review,” said HDFC Bank Chief Economist Abheek Barua. The political instability at the Centre might derail reforms and have implications on fiscal deficit and RBI’s policy stance, bankers said.
RBI also made a pointed reference to what the government needed to do. It conceded a “competitive interest rate is necessary” for growth revival, but added this was “not sufficient”. Governor D Subbarao said: “Sufficiency conditions include bridging supply hurdles, staying the course on fiscal consolidation, in quantity and quality, and improving governance.”
Industry’s reaction was cautious. CII President Adi Godrej said, with the nascent signs of upturn in industrial production and expectations of a normal monsoon, “it is necessary that RBI provides the boost to the green shoots of recovery”.
