Your turn now, RBI tells government
A file photo of the RBI building in Mumbai. Photo: Abhijit Bhatlekar/Mint
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Updated: Tue, Mar 19 2013. 11 43 PM IST
Mumbai: The Reserve Bank of India (RBI) on Tuesday
trimmed its key lending rate by a quarter percentage point, doing so
for the third time in the past one year, to breathe life into Asia’s
third largest economy, but signalled that its rate-easing cycle may be
nearing an end despite concerns of slowing growth.
The
widely anticipated cut is unlikely to result in a lower cost of funds
for retail or corporate borrowers, and, in its guidance, the central
bank expressed its concern over inflation and the size of India’s
current account deficit (CAD).
“Headline
inflation is expected to be range-bound around current levels over
2013-14... Risks on account of the CAD remain significant. Accordingly,
even as the policy stance emphasizes addressing the growth risks, the
headroom for further monetary easing remains quite limited,” RBI said.
And,
while admitting the role of a low interest rate regime in boosting
economic growth, it emphasized that it was more important for the
government to address issues related to capacity building, fiscal
prudence and governance itself.
The apex bank kept the cash reserve ratio (CRR), the portion of deposits banks need to park with RBI, unchanged at 4%.
For
the financial market, RBI’s rate action was largely a non-event as it
had factored in the move, but the apex bank’s caution on future rate
cuts weighed heavily, driving the bellwether equity index, the S&P
BSE Sensex, by 353 points below the psychologically important 19,000
mark.
The rupee fell by half a percentage point and bond yields rose.
The
Sensex later pared some of its losses to close the day at 19,008.10
points, down 1.48%, while the rupee ended at 54.38, down 0.37%. The
yield on India’s 10-year bond ended at 7.91%, up from 7.87% at the last
close.
More
than the RBI action, the decision by the Dravida Munnetra Kazhagam to
withdraw support from the Congress-led United Progressive Alliance
government dampened market sentiment, analysts said.
Banks may not take
signal
The
25 basis points (bps) cut in the repo rate, at which RBI lends
short-term funds to banks, to 7.5% will not benefit borrowers in the
near future as leading banks have ruled out any immediate cuts in
lending rates. A basis point is one-hundredth of a percentage point.
“A
repo rate cut doesn’t mean much for the banking system, as it will not
bring down our cost. Any significant cut in lending rates is unlikely,”
said Pratip Chaudhuri,
chairman of State Bank of India, the country’s largest lender. A cut in
CRR would have enabled the bank to lower its lending rates further, he
added.
R.K. Bansal,
executive director of IDBI Bank Ltd, also ruled out any immediate
reduction in rates. “The deposit rates have to first come down before
reduction in lending rates, but high inflation poses hurdles to lower
the deposit rates,” Bansal said.
For
companies, there was not much reason to cheer. “CII (Confederation of
Indian Industry) was hoping that the RBI would go ahead with a 50 bps
reduction in the repo rate to make a significant impact on investor
sentiments,” said Adi Godrej, president of the lobby group.
Naina Lal Kidwai,
president of the Federation of Indian Chambers of Commerce and
Industry, another industry lobby, said the association hopes that “RBI
will follow this up with further rate cuts even though they have
indicated that headroom for further cuts is limited”.
RBI
began cutting rates in April last year after hiking it 13 times between
March 2010 and October 2011 to fight inflation. Since then, it has cut
the repo rate by 100 bps and slashed CRR by 75 bps.
Meanwhile,
the Indian economy is estimated to expand at a decade’s low of 5% in
the year ending 31 March by the government’s own estimates.
Unlike
the 2008 financial crisis, following which RBI sharply eased its
monetary policy to boost growth, the central bank has been cautious this
time due to surging inflation and the rising fiscal deficit.
Inflation
based on wholesale prices has fallen below 7% in recent months after
staying above that level throughout the past year. After easing to 6.62%
in January, it inched up to 6.84% in February. But core inflation, or
non-food, non-oil manufacturing inflation, eased significantly to 3.79%
in February from 4.12% in January.
But
RBI is not confident of inflation easing in the new fiscal year.
“Notwithstanding moderation in non-food manufactured products inflation,
headline inflation is expected to be range-bound around current levels
over 2013-14 in view of sectoral demand-supply imbalances, the ongoing
corrections in administered prices, and their second-round effects,” it
said.
While
acknowledging the need to support growth, the Indian central bank
reiterated its stance that efforts to boost growth should come primarily
from the government. “A competitive interest rate is necessary for
this, but not sufficient. Sufficiency conditions include bridging the
supply constraints, staying the course on fiscal consolidation, both in
terms of quantity and quality, and improving governance,” RBI said.
Planning Commission deputy chairman Montek Singh Ahluwalia
said the rate cut was a “clear signal” that inflation is subsiding.
Noting that RBI’s move will lead to “softening” of rates, Ahluwalia said
the rate cut “could have been larger”.
C. Rangarajan,
chairman of the Prime Minister’s economic advisory council, said any
further rate action will depend on how inflation behaves. According to
the former RBI governor, policy action will be “very difficult” going
ahead unless inflation declines.
Also,
RBI may step up open-market operations (OMOs), or bond purchases from
the market, to manage liquidity in the banking system, Rangarajan said.
RBI has been extensively conducting OMOs to ease liquidity. Tight liquidity has forced banks to borrow an average Rs.1 trillion daily from RBI’s liquidity window since January. On Tuesday evening, the central bank announced a Rs.10,000 crore OMO to be conducted on 22 March.
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