Lending rate to pinch less

Banks to lower rates shortly RBI cuts CRR by 25 bps and signals easier policy in October

The Reserve Bank of India did not take any big step on inflation or growth in its monetary policy review on Monday, but the message it sent out was enough for bankers to signal an imminent cut in lending rates. Though the 25-basis point (bp) cut in the cash reserve ratio or CRR (the proportion of deposits banks need to maintain with the RBI), which will infuse around Rs 17,000 crore into the system, is not going to do wonders for either liquidity or bank credit growth, experts say the central bank gave enough hints of policy easing in October’s monetary policy review. In any case, a CRR cut is more potent than a cut in policy rates, they say.

The CRR cut comes into effect from the fortnight beginning September 22. Following on Monday’s decisions, the CRR will come down to 4.5 per cent, while the repo rate — at which the central bank lends to the banks — would remain unchanged at eight per cent.

For a change, the central bank was on the same page as the government. Pointing out that the government’s recent actions paved the way for a more favourable growth-inflation dynamic, the RBI said “monetary policy also had an important role in supporting growth revival”. The central bank, however, hastened to add the primary focus of monetary policy remained the containment of inflation and anchoring of inflation expectations.

RBI SAYS...

• Steps taken to increase FDI should contribute to both greater capital inflows and higher productivity, particularly in the food supply chain
• Government’s recent actions have paved the way for a more favourable growth-inflation dynamic 
• Late rains have augmented storage in reservoirs, improved prospects for rabi crops
• Capping subsidies under two per cent of GDP crucial to manage demand-side pressures on inflation
• Holding down the CAD to sustainable levels will depend on durable fiscal consolidation

Though India Inc termed the RBI’s refusal to cut the repo rate a “deep disappointment”, bankers were far more positive. SBI Chairman Pratip Chaudhuri said it would review rates and the asset-liability committee would meet on Tuesday. The cut, he indicated, would be in the areas of manufacturing and medium and small-scale industries. Several public sector bank chiefs said their asset-liability committees would meet shortly on a possible rate review.

ICICI Bank MD and CEO Chanda Kochhar said given the comfortable liquidity and recent reduction in deposit rates by banks, interest rates could be expected to trend downwards gradually. However, she said banks would have to keep an eye on funding costs, given the level of CASA deposit growth. HDFC Bank Chief Economist Abheek Barua said the RBI was leaning towards a more dovish stance and was willing to support growth. He expected a 50-75-bp cut in lending rates in the current year.

The markets were not so happy, with key stock indices paring initial gains after the policy announcement. The Sensex gained 0.42 per cent or 78 points to close at 18,542.31, its highest finish since July 2011.

Banking stocks rallied. ICICI Bank, the top gainer on the Sensex, rose 5.39 per cent to Rs 1,060.60.

RATE CUT MUST WAIT BUT DOVISH TONE IS HERE

“Given the comfortable liquidity and the recent reduction in deposit rates by banks, interest rates in general could be expected to trend downwards gradually”
                                                                                        Chanda Kochhar
                                                                                   MD & CEO, ICICI Bank

It is a positive move but not to the extent we hoped for. It shows that RBI is willing to respond. Our asset liability committee will meet tomorrow to take a call on interest rates
Pratip Chaudhuri
Chairman, State Bank of India

“Everyone was expecting a rate cut this time. However, RBI seems to be waiting for inflation to soften further. So, probably in the next 6 weeks or so, we can expect a rate cut. Banks have already started lowering rates and a cut by RBI next time will help consumers get relief”
                                                                                           Rajeev Talwar
                                                                                  Executive Director, DLF