Loans to get cheaper as RBI cuts rates for first time in 9 months
After a gap of 9 months, the Reserve Bank of India (RBI) on Tuesday slashed short term lending (repo) rate by 0.25 percent to 7.75 percent, a move that will reduce the cost of home, auto and corporate loans.
The reverse repo rate under the liquidity adjustment facility, determined with a spread of 100 basis points below the repo rate, stands automatically adjusted to 6.75 percent.
The RBI also slashed the cash reserve ratio ( CRR) by 0.25 percent to 4 percent. As a result of this reduction in the CRR, around Rs 18,000 crore of primary liquidity will be injected into the banking system.
While repo rate cut will reduce the cost of borrowing for individuals and corporates, the reduction in CRR, which is the portion of deposits that banks have to park with RBI, would improve the availability of funds.
“The stance of monetary policy in this review is intended to provide an appropriate interest rate environment to support growth as inflation risks moderate,” Subbarao said while unveiling the policy review.
“The moderation in inflation conditions provides the opportunity for monetary policy to act in conjunction with fiscal and other measures to stem growth risks,” Subbarao said.
He praised government’s recent reform measures including liberalisation of FDI in retail, deferment of GAAR and progressive deregulation of fuel prices saying these actions would “help engender stable macroeconomic conditions and return the economy to its high growth trajectory.”
Planning Commission Deputy Chairman Montek Singh Ahluwalia said the CRR cut will have impact on long term interest rates.
“I think this is the right thing to do at this point of time given that (the decline) in economy is beginning to bottom out,” he said.
On the possible impact of the RBI’s decision on the interest rates, Bank of India executive director N Seshadari said most of the banks will transfer the rate cut. “Full transmission will happen on both lending and deposit rates. A 0.25 per cent cut is most likely.”
Echoing similar views, Canara Bank executive director A K Gupta said the bank would consider interest rate cut in the light of RBI policy action.
The bank last cut rates in April 2012 following an aggressive monetary tightening drive to contain inflation. It has been resisting calls from business leaders and politicians to reduce borrowing costs to spur the economy.
In a report on the economy, issued a day before its policy review, the RBI has lowered the growth projection for the current fiscal to 5.5 percent from 5.6 percent projected earlier. They have also cut the growth forecast for the next financial year to 6.5 percent from 6.6 percent.
RBI Governor D Subbarao said, “Large fiscal deficit will crowd out private investment and will also accentuate current account deficit gap. Financing current account deficit with a volatile flows is risky”.
As regards inflation, the RBI said it was likely to moderate below its projection of 7.5 percent by March-end. However, it added, “suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materialises, inflation path may turn stick.”
Referring to recent reforms initiatives, it said, “(they) have reduced immediate risks, but there is a long road ahead to bring about a sustainable turnaround for the Indian economy. Business sentiments remain weak despite reform initiatives and consumer confidence is edging down.”
Referring to the problem of rising Current Account Deficit (CAD), difference between outflow and inflow of foreign exchange, the RBI said it was likely to exceed 4 percent for the second successive year in 2012-13.
“The CAD/GDP ratio reached its highest ever peak of 5.4 percent of GDP in Q2 of 2012-13. Early indications are that it may increase further in Q3 of 2012-13. CAD has widened mainly due to worsening of trade deficit,” the RBI said.
Key highlights of RBI policy review