Reserve Bank of India Governor D Subbarao on Tuesday went halfway by cutting the cash reserve ratio, which determines the amount of cash banks must keep with the central bank, by 50 basis points (bps) to 5.5 per cent. But, the central bank’s refusal to go the full distance was termed “woefully inadequate” by many in industry.
Subbarao initially warmed many hearts by saying the CRR reduction “can be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them.” But, what many see as a sting in the tale is RBI’s assertion later in the third-quarter monetary policy statement that “it would be difficult to predict the timing, pace and magnitude of any interest rate cuts” and “strong signs of fiscal consolidation” are necessary for it to happen.
Analysts interpret this as a long wait for any action on the rate front. Nomura economists Sonal Varma and Aman Mohunta said, “RBI has denounced government policy on several counts. This suggests unless there is large fiscal consolidation, which is unlikely in our view, policy rate cuts in this cycle will probably be limited. In our view, a repo rate cut in March looks unlikely.”
With core inflation still high, RBI left its policy repo rate unchanged at 8.5 per cent in its second consecutive review.
While India Inc welcomed the CRR cut move, which will infuse Rs 32,000 crore liquidity in the system, it was clear many were hoping for more. Most corporate chiefs said the central bank should waste no time in cutting key policy rates.
Rajeev Talwar, Group ED, DLF, said, “RBI’s extreme cautiousness is discouraging. Instead of asking government to kick-start reforms, RBI needs to be serious about boosting growth, especially when GDP growth has come down to seven per cent. The next policy is there in six weeks’ time and RBI should not wait for the Budget to get over to announce rate cuts.”
The apex industry chambers also said RBI needed to start reducing the repo rate in order to boost the investment cycle, which had weakened.
Some, however, say a rate cut is a virtual certainty going forward; it’s only the timing and pace of cuts that are moot. HDFC Bank Chief Economist Abheek Barua said recent comments by senior RBI officials seemed to emphasise the CRR was not only a liquidity management tool but also an anti-inflationary instrument. A cut would, therefore, prima facie, mean an easing of the vigil on prices. “The fact that the RBI governor chose to go the whole hog and cut the CRR not by a token 25 bps but by a full 50 bps despite the fact the December core inflation print was a rather high 7.7 per cent is an indication of RBI’s growing concerns over liquidity and growth,” he said.
The central bank’s action also signifies its concern on economic growth, which may get disrupted if tight liquidity conditions persist.
| ANATOMY OF THE POLICY MOVE | |||
| KEY MEASURES | 8.5% Repo rate retained | 7.50% Reverse repo rate unchanged | 5.5% CRR cut 0.5% from 6% |
| CENTRAL BANK’S PROJECTIONS | POLICY STANCE | EXPECTED OUTCOMES | |
| * Revises down growth forecast for year ending March to 7% from 7.6%, with a downward bias * Retains March-end WPI inflation forecast at 7% * Retains FY12 money supply growth projection at 15.5% | * Large structural deficit in the system presents a strong case for injecting permanent primary liquidity into the system * Maintain an interest rate environment to contain inflation and anchor inflation expectations * Manage liquidity to ensure it remains in moderate deficit, consistent with effective monetary transmission | * Ease liquidity conditions * Mitigate downside risks to growth * Continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation | |
RBI cut its growth forecast for the current fiscal year to seven per cent from 7.6 per cent due to worsening global and domestic economic conditions. It retained its March-end inflation projection of seven per cent, but said there were risks to that target as the effect of a weaker rupee wasn't completely reflected in prices yet, while a loose fiscal policy would also stoke demand. Credit growth projections have been scaled down to 16 per cent from 18 per cent earlier.
Bankers were happy and said the cut would help improve their interest margins. However, they will have to look at whether to cut the interest rates they charge because the cost of funds remains high. State Bank of India Chairman Pratip Chaudhuri said industry lending rates may come down in some segments.
Chaudhuri also said the spreads may come down even if the base rate did not come down. The CRR cut lifted the sentiment since an increase in volume could be expected, he said.
The government was quite happy. C Rangarajan, chairman of the Prime Minister's Economic Advisory Council, said the lending rate could not be lowered unless non-food inflation showed definite signs of easing. But, he expects food inflation to "continue to fall through March, and the secondary effect of such easing will bring down the overall inflationary pressure".
Government bond prices initially rose on the surprise cash reserve ratio cut, but turned lower after concerns the central bank may not be in a hurry to cut its policy rate. Stock prices extended gains, with the Bombay Stock Exchange's benchmark Sensitive Index up 1.46 per cent at 16,995. The rupee reacted positively as well. The dollar slipped to Rs 49.92 from Rs 50.04 before the decision.
Bankers who met the central bank brass after the policy announcement said RBI had asked them to increase credit growth and refrain from being unduly worried about the creation of non-performing assets.
“Although banks need to be prudent while sanctioning credit proposals, risk-aversion by the banking sector could adversely affect credit flow to the production sectors of the economy,” RBI said in the policy statement.
