The Reserve Bank of India early on Thursday announced a 25 basis point reduction in the repo rate to 7.75%. The move, which had long been demanded by corporate India and more recently anticipated by economists, was met with swift approval from all quarters.
Corporate leaders across sectors welcomed the timing of the cut, even as some of them questioned its size and the scope for impact. However, the general consensus is that Governor Raghuram Rajan, who had promised to effect an out-of-policy rate cut if inflation numbers held steady, has delivered and is moving in the right direction.COMPANIES
“This is a good development. Easing rate stance will help revive health of businesses which are highly sensitive to interest rate movements apart from improving the general sentiment towards investments,” said R Shankar Raman, chief financial officer at engineering and construction major L&T.
Prabal Banerjee, president (international finance), Essar Group, was enthusiastic about the rate cut. “This is a very, very positive move and comes at the right time ... This step will reduce costs for corporates when they are in revival mode," he said, adding that he expects another rate cut by the next policy review.
"I see this as a step in the right direction, a signal. But a 25 bps cut may not be enough to spur the investment cycle," said Harsh Mariwala, chairman of FMCG major Marico.
"There will have to be more cuts, lending rates have to come down by at least one or two percentage points to get investments going," he said, adding that he, too, expected more interest rate cuts in February or March.
Venugopal Dhoot, chairman of domestic consumer goods firm Videocon Industries, said that while it was important where one is at the moment, "... what is important is the direction in which you are. So even though a quarter per cent is negligible, but this shows that inflation will definitely be under control and all other economic parameters are also showing sustained improvement and that's why everybody is happy about the positive surprise from RBI."
M S Unnikrishnan, MD & CEO of Thermax Limited said that the RBI action was on expected lines with both WPI and CPI under control. "With the credit offtake not galloping, RBI had to take this step so that the investment cycle is supported," he said. "However, this is only an initiation. With CPI expected to be under control for the next six months with crude oil price fall, we expect the RBI to progressively reduce rates and base rates could also come down by 100 basis points in the future." MARKETS AND FUNDS
Markets also took the surprise announcement as a sign that the economy was turning.
“RBI’s move was a big surprise. That’s why market has also opened with a huge gap up. Rate cut was long expected by the market. Now that it has come, stocks in the financials, real estate, infrastructure and consumer durables space should do well,” said Motilal Oswal, chairman of Motilal Oswal Financial Services.
“The next big trigger that the market will eye is the Budget. Investors want bold reforms from the government,” he added.
"Foreign fund flows had dried up in the last couple of weeks. Now with the macro-economic scenario showing signs of recovery and the RBI rate cute, we believe foreign fund flows will resume. You should global investors increasing their asset allocation to India equities in 2015," said Prabodh Agrawal, President and Head of Research at IIFL Institutional Equities.
“The rate cut of 25bps comes in the wake of a visibly lower CPI and the confidence in being able to achieve the targets set for future . We believe that the current rate cut heralds a shift in monetary stance and creates a case for continued rate cuts in future. Fiscal developments would continue to play a key role in the quantum and timing of future rate cuts too,"said Lakshmi Iyer, Chief Investment Officer (Debt) & Head (Products), Kotak Mutual Fund.
S Naren, chief investment officer at ICICI Pru, said that given the fall in global commodities prices - crude and metals, and disinflationary scenario globally, the rate cuts were not surprising. "it was in line with our expectations and the governor kept his promises of no unnecessary delays in rate cuts.But going forward we don't think RBI will cut in February policy as is widely expected.But RBI take another cuts in March policy. Infrastructure space looks very promising from a long term view."
"RBI had to act as global situation warranted for such an action. I am not surprised by the move. Cyclicals will be the big beneficiaries," noted Navneet Munot, CIO, SBI Funds Management.
BANKS AND REALTORS
Meanwhile, it remains to be seen whether banks pick up the gauntlet and pass the cuts down the line to borrowers.
“It is a good sign for the economy and confidence booster for the buyer. Hopefully banks will pass on the cut to home buyers. It will lead to more launches in real estate sector and projects getting completed on time,” said Rajeev Talwar, executive director, DLF.
T S Bhasin, chairman of industry body Indian Banks' Association (IBA), said RBI's action will set the tone for banks to reduce lending rates. Bhasin, who is also chairman and managing director of Chennai-based Indian Bank, said his bank has already brought down rates in last few months for few categories like home loans.
“The asset-liability committee will meet shortly,” he said, but did not indicate the extent of revision.
"I expect that about 75-100 basis points reversal in repo rate will happen in this year. Banks will first have to look at cutting the deposit rates in order to reduce cost for them and to maintain the spreads. And then the cut in lending rates will follow," said Y M Deosthalee, Chairman & Managing Director, L&T Finance Holdings.