Good times for Indian borrowers
mumbai — The Reserve Bank of India (RBI) on Tuesday cut its key lending rate, the repo, by 25 basis points to 6.5, bringing it down to a five-year low. But businesses and analysts, who were expecting a 50 bps cut, were disappointed.
RBI governor Raghuram Rajan acknowledged that inflation has evolved along the projected trajectory and the target set for January had been met with a marginal undershoot.
“Going forward, consumer price index [CPI] inflation is expected to decelerate modestly and remain around 5 per cent during 2016-17 with small inter-quarter variations,” said Rajan. “There are uncertainties surrounding this inflation path emanating from recent unseasonal rains, the low reservoir levels by historical averages, and the strength of the recent upturn in commodity prices, especially oil.”
Rajan also noted that borrowing rates were coming down significantly. He hoped that banks, which last year stubbornly refused to pass on the benefits of lower interest rates, would do so now.
In fiscal 2015-16, the RBI had cut the repo rate by 125 bps, but banks had lowered their lending rates by just 60 bps.
Rajan also indicated that the central bank’s policy would remain “accommodative”, indicating there was room for a further 25 bps cut later during the year.
On Tuesday, Rajan also reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 95 per cent of the requirement to 90 per cent with effect from April 16, 2016, while keeping the CRR unchanged at four per cent of net demand and time liabilities (NDTL).
The statutory liquidity ratio (SLR) of scheduled commercial banks had been reduced by 25 bps to 21.25 per cent of their NDTL from April 2. These measures, he hoped, will create space for banks to increase their lending to productive sectors on competitive terms so as to support investment and growth.
There was mixed reaction from the markets and India Inc to the latest rate cut by the RBI. Both bonds and stocks fell after Rajan’s announcements.
“Though India Inc would have liked at least a 50 basis points cut in the policy interest rates by the RBI, the measures announced to inject enough liquidity into the system should enable banks to cut the lending rates,” said Sunil Kanoria, president, the Associated Chambers of Commerce of India (Assocham).
Eventually, lower interest rates would have an all-round positive impact in terms of reducing the non-performing assets, increased investment, aggregate domestic demand and overall vibrancy in the system, noted Kanoria.