MUMBAI, Apr 17:
In a surprise decision, the Reserve Bank today cut the benchmark interest rate for first time in three years by 0.5 per cent to provide relief to borrowers and revive the sagging economic growth.
Unveiling the annual credit policy here, the RBI reduced the short-term lending (REPO) rates to eight per cent from 8.5 per cent. Bank rate is cut to nine per cent from 9.5 per cent
Banks, led by the State Bank of India, immediately announced they would substantially cut the lending rates that would benefit auto, home and personal loan borrowers. However, it may not be a good news for depositors, who will earn lesser interest rates.
SBI Chairman Pratip Chaudhury said his bank would “do a comprehensive cut” in lending rates. Asked if there will be substantial reduction in interest rates, he said, “Yes it will be”. Several other banks too said they would go in for the rate cuts and reduce deposit rates.
“The reduction in the REPO rate is based on an assessment of growth having slowed …Which in turn, is contributing to moderation in core inflation, RBI Governor D Subbarao said.
Besides, the RBI has directed the banks not to insist on a minimum balance on saving bank accounts, and not to levy charges on prepayment of loans.
The reduction in the REPO rate at which RBI lends to banks, has been prompted by deceleration in growth and softening of inflation.
The cut is aimed at spurring growth to 9 per cent levels, seen before the global financial crisis that began in 2008, Subbarao said. “The reduction in the REPO rate is based on an assessment of growth having slowed below its post-crisis trend rate, which, in turn, is contributing to the moderation in core inflation,” the Governor added.
RBI has pegged the GDP growth rate for 2012-13 at 7.3 per cent. It is expected to be 6.9 per cent in 2011-12.
After two consecutive cuts since January, the Governor, however, retained the cash reserve ratio at 4.75 per cent.
Subbarao, however, ruled out further reduction in policy rate in the immediate future citing persistent upside risks to inflation and possible fiscal slippages driven by higher oil subsidies. It expects the inflation to be around 6.5 per cent by March 2013.
“It must be emphasised that the deviation of growth from trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates,” he said.
RBI has raised lending rates 13 times between March 2010 and October 2011 to contain inflation that had been hovering near double-digit. This had led to clamour by industry to cut rates and spur industrial and economic growth that has slowed down considerably during the past few quarters.
In order to ease tight liquidity situation, Subbarao announced doubling the borrowing under the Marginal Standing Facility for banks to 2 per cent of their deposits with immediate effect. It also permitted banks to borrow under the MSF even if they have excess government securities holdings.
On the growth front, RBI expects FY’13 to be moderately better than the fiscal gone by. It has pegged GDP growth at 7.3 per cent, which is 0.3 per cent lower than the Government projection for 2012-13. Growth in 2011-12 is seen at a 3-year low of 6.9 per cent.
Even though spurring growth has taken the priority at the Mint Road, RBI continues to be worried about the inflation scenario, calling it as “challenging” due to the sharp spikes in crude prices and food articles in the recent months.
Noting the moderation in manufacturing inflation, the Governor pegged the annual overall inflation target at 6.5 per cent for FY’13 (which is 0.5 per cent lower than its projection for FY’12), saying the price rise will be range- bound through the year.
Inflation was the key driver that guided the Reserve Bank to tighten money supply, and later hold rates during the past 36 months.
The period also saw it inflicting 13 simultaneous hikes, by 3.75 per cent in REPO rates over the 19-month period, making it one of the most aggressive central banks in the world.
Apart from hurting investment activity, the rate hikes severely hurt the retail borrowers as higher loan repayments put household budgets for a toss.
RBI made a conscious effort at placating this class by reiterating that banks should not charge prepayment penalties from home loan borrowers. It also announced to set up a working group to assess the possibility of having long-term fixed interest products which will not be exposed to interest rate changes.
As for the bank non-food bank credit, the apex bank sees it growing at 17 per cent this fiscal, (marginally higher than that of FY’12), and deposits at 16 per cent.
Besides, RBI has set-up a working group under K U B Rao to look into all aspects relating to gold loan by NBFCs.
“There has been significant increase in loans by NBFCs against gold in the recent period. There are also complaints against some NBFCs that they are not scrupulously following proper documentation process and know your customer (KYC) norms, among others, in order to quickly dispose off the cases relating to gold loans,” RBI said.
Gold imports have also increased sharply, raising macroeconomic concerns, it added.
The working group is expected to submit the report by end-July 2012, it added.
RBI will undertake the mid-quarterly review of the monetary policy on June 18 while first quarter review is scheduled on July 31.
Finance Minister Pranab Mukherjee said the RBI policy would boost investment sentiment. The Government will take more steps in this direction, he added.
“The growth, which has weakened in past months, should now improve,” he said, adding “the monetary policy announcements should help in investment revival and contribute to strengthening of business sentiments. In the coming weeks we will take some additional steps to further reinforce focus on growth”.
Mukherjee said moderation of core inflation rate for four months in a row, coupled with the sharper decline in inflation for manufactured products from 7.6 per cent in December to 4.87 per cent in March, has facilitated the change in monetary policy stance.
“However food and primary inflation has shown signs of hardening. This is a cause for some concern. We intent to continuously monitor the situation and take the required steps to manage the short term supply constraint for those food items which contribute inflation,” he said.
Mukherjee said the Government will do everything possible to maintain price stability.
Meanwhile, Planning Commission Deputy Chairman Montek Singh Ahluwalia said the cut in REPO rates was an indicator of ‘many more such things to happen in the course of the year’.
Speaking to reporters on the sidelines of a function here, he expressed confidence that the country’s GDP will grow at 7.3 per cent or more as forecast by the RBI.
‘I think it is a good way to start the year with a cut in REPO rates. It indicates that RBI is satisfied that inflationary pressure is no longer a principle thing to worry about,’ he said.
About the projected GDP growth of 7.3 per cent, the noted economist said he believed it was possible.
‘We have to do a lot of things to get the investment in infrastructure projects moving. I believe that implementation difficulties which were holding up many investment are being overcome. The matter was of great concern for people like those who invested in power plants,’ Mr Ahluwalia said.
He said the Centre was keen to remove physical impediments to investments and a quick decision was expected as early as a week’s time.
By lowering the REPO rate, the RBI Governor was giving a signal that the economy was now ready to give a stimulus generally without any danger to the inflationary trend, he said.
When asked whether inflation moderate towards end of this year, he said inflation was always a matter of concern and no body should be complacent about it.
‘I would like to see the inflation come down a little more. I read the RBI lowering REPO rate as a balance judgement. Inflation is (still) matter of concern. But now the time has come to change signals because it has come down and you cannot wait until it comes down to a very low level,’ he said as the likely reasons behind the RBI’s move.
Mr Ahluwalia defended the Central bank’s slew of measures to cool down the inflation during the last two years and said measures like tightening the money supply when things look to get worse and relaxing it when things getting better were needed.
‘Obviously many things can happen. Many things can change. Policies should be adjusted as things move and that’s I think what they (RBI) have done,’ he said, adding “I think the lowering of the interest rate by the RBI combined with what the Finance Minister has said that he is going to bring the fiscal deficit down and moves to make economy move faster. I expect it (Indian economy) to do better than the previous year”.
He said the Planning Commission was not making any forecast on GDP growth at present, but shortly would be preparing the plan. ‘What happens is different ministries make different pronouncement on different times. But I agree with the proposition that we should do better and RBI said is better,’ he said. (AGENCIES)
MUMBAI, Apr 17: