He has often said that the Reserve Bank of India is not a cheerleader for the economy but on Tuesday Governor Raghuram Rajan did turn into one as he delivered a hefty — and unexpected — 50 basis point cut in policy rates to 6.75 per cent from 7.25 per cent that sent sentiment soaring and pulled market indices and the rupee back into positive territory. In doing so, Rajan shifted the onus back on to the Centre for driving the economy into the high growth path.
Significantly, he also co-opted the government to work with the RBI to remove “impediments” that prevent banks from passing on the cumulative rate cut of 125 basis points in 2015 to borrowers. Such impediments include the higher rates offered in other financial products such as small-savings schemes and the large stressed assets in the banking system that prevent banks from passing on the benefit of lower rates to borrowers.
The effect of the Governor’s talk was immediate as the country’s largest bank, State Bank of India, cut its base rate by a sharp 40 basis points to 9.30 per cent, the lowest among all banks now. This is expected to spark a rate-cut war among banks, benefiting retail, micro, small and medium enterprises and corporates.
“RBI has cut interest rate by 50 basis points, we have reduced it by 40 basis points,” SBI Chairman Arundhati Bhattacharya said. “We will definitely keep looking at ways and means of bringing down the rate further. Going ahead, the weakening of rate will add to growth of credit.”
The government and corporates welcomed the move. “Today’s rate cut will boost investment and growth,” Finance Minister Jaitley said. “We are looking forward now to the transmission of these cuts, which will help boost economy and confidence.”
In the past few months, India Inc and the Finance Ministry have been vociferous in their demands for a rate cut. After this rate cut, which the RBI termed as frontloaded, there may be a prolonged pause, say analysts.
With this, the central bank has cut the repo rate four times, cumulatively by 125 basis points or 1.25 percentage points, in the current calendar year. The previous rate cuts were baby-steps of 25 basis points each.
Conditions right “I think the policy is very clear that since our last policy statement, the conditions that we had laid out for further accommodation have been broadly met, except perhaps the monsoon,” Rajan said. “If you see around the world, there is a general sense that global activity is going to be further downgraded from what we thought in August. So that gave us a sense that we probably could look for a little more room, given that that would also impinge on domestic demand.”
Indian Banks’ Association Chairman Ashwani Kumar said banks have already passed on the benefits of the previous cuts by 30 basis points. Rajan said capacity utilisation, which leads to more investment, is still tepid and that would suggest there is room for more domestic demand which will be non-inflationary. The RBI chief felt that investors are likely to respond strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow. The RBI said that it will aim to get retail inflation down to 5 per cent by 2016-17 end. In the April policy, it had announced 4 per cent retail inflation target by end of 2017-18.