Move will help revive the capex cycle: Keki Mistry

The third quarter monetary policy review came in as a pleasant surprise with a 25 basis points reduction both in the repo rate and the cash reserve ratio (CRR). While the cut in the repo rate, the rate at which the central bank lends money to banks, was largely in line with market expectations, the reduction in CRR, or the portion of funds commercial banks are required to park with the apex bank, is a pre-emptive move to ensure the availability of adequate liquidity in the system.

Typically, one sees that in the months of February and March, liquidity tends to get tight. This to my mind is primarily on account of two key reasons: first, the payment of advance tax and second, companies tend to purchase equipment or plant and machinery before the end of the financial year in order to avail of depreciation benefits for tax purposes. This twin phenomena tend to result in some tightness of liquidity. Thus, an early release of liquidity of around Rs 18,000 crore into the system is a welcome measure.

It has often been seen that a repo rate reduction in isolation does not necessarily translate into lower interest rates, while the monetary transmission in the case of a CRR reduction tends to be more effective. One does expect to continue to see some further easing of interest rates over the next two quarters. This would augur well for the economy, especially since the need of the hour is to revive the investment cycle.Concerns still persist on the overall slowdown in the economy and this is also reflected in the Reserve Bank of India’s scaled down gross domestic product growth estimate of 5.5 per cent for FY 2013. However, the silver lining is in the inflation rate projection, which has now been lowered to 6.8 per cent for March 2013. Lower commodity prices, especially crude, is extremely critical for India since the country imports over 70 per cent of its crude requirements. To conclude, the rate cuts, along with the positive statements in the policy to support growth, will improve overall sentiment, which in turn would gradually help revive the capital expenditure cycle.

Keki Mistry
Vice Chairman & CEO, HDFC Ltd