The Reserve Bank of India today surprised the market with a more-than-expected cut in the key policy rate, or the repo rate, by 50 bps to 8% to restore the growth momentum in the economy. But, the central bank said the scope for further rate cut is limited.
The market was expecting a 25 basis point cut. This was the first time in three years that the central bank has reduced the rate which signals a reversal in the tight monetary policy stance.
With this reduction in the rate banks are now expected to pass on the benefit to their customers by lowering lending rates.
The decision to cut rate, according to the RBI, was driven by the fact that growth has fallen below the post crisis trend and fall in inflation, especially core inflation though volatility in oil prices due to geopolitical tension may exert pressure on inflation.
“Growth decelerated significantly to 6.1% in the third quarter of last year, although it is expected to have recovered moderately in the fourth quarter. Based on current assessment, the economy is clearly operating below its post-crisis trend,” RBI governor Subbarao said in a statement. Subbarao also noted that non-food manufactured products inflation has dropped from a high of 8.4% in November 2011 to 4.7% in March 2012, which came below 5% for the first time in two years.
Though bond prices surge following the policy announcement, stock markets are still treading cautious as RBI said the scope for further reduction in policy rates is limited.
“It must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates,” Subbarao said.
Reacting to rate cut, the yields on the 10-year benchmark government bond dipped to 8.22% from the opening levels of 8.51%.
The rates on certificates of deposits that had touched three year highs of 11.75% in March had softened to 10% on relatively better liquidity conditions this week. Today, the rates have fallen further to around 9.5% post the policy announcement. "The rate cut of 50 bps was a positive surprise for the markets. We can expect rates to soften further," said Ajay Manglunia, senior vice president, Edelweiss Securities.
The overnight call rates were trading between 8.9-8.65% levels while banks withdrew Rs 80,200 crore from the RBI's repo facility today. The repo borrowings have come down significantly to around Rs 70,000 crore to Rs 80,000 crore from Rs 2 lakh crore witnessed in the last week of previous financial year.
Home loans, consumer credit to become cheap. Deposit rates will follow
After bearing burden of high cost loans, bank customers can look forward cut of 25-50 basis points in interest rates.
Bank executives said RBI has effected a sharp cut, making banks to rework the rates they charge to customers across the spectrum.
Banks will also reduce deposit rates but it would happen in gradual manner due to competition from bonds and small savings schemes.
Senior Punjab National Bank official said the home loans will become cheaper. His bank will soon review rate structure for range of consumer loans.
The base rate, benchmark used to price loans, for most banks is above 10%.
- FY13 GDP growth projected at 7.3%
- Non food credit growth for FY13 projected at 17%
- Deposit growth projected at 16%
- Money supply growth projected at 13%
- March 2013 inflation projected at 6.5%
- MSF borrowing cap raised to 2% vs 1% of banks' NDTL