The RBI today pared the repo rate a token 25 basis points to 7.50 per cent, with the warning that there is little headroom for more action.
However, it left the cash reserve ratio (CRR), the slice of deposits that banks have to park with the Reserve Bank of India, unchanged at 4 per cent. Even as it nudged down the repo rate (the interest rate at which it provides short-term liquidity to banks) to address growth risks, the central bank cautioned that inflationary pressures remained.
Banks unlikely to act
With the RBI altering only the repo rate, banks are unlikely to immediately cut deposit and lending rates. As there is barely a fortnight left for the financial year to end, bankers are busy bulking up their balance-sheet. Hence, they will take a call on cutting deposit and lending rates only next month. As R. K. Bansal, Executive Director, IDBI Bank, said: “Liquidity in the banking system is tight in the run-up to the financial year-end.
Moreover, a lot of bulk deposits mature in March. Hence, banks will want to retain deposits due to year-end considerations. Further, credit typically picks up during this time of the year. Given this situation, there is little scope to either cut deposit rates or lending rates.”
Monetary policy in the current financial year so far has sought to balance the growth-inflation dynamics through a combination of measured steps for liquidity easing and policy rate cut.
The RBI said growth has decelerated significantly, but was more worried that inflation remained at a level not conducive for sustained economic growth.
GDP growth in the third quarter at 4.5 per cent was the weakest in the last 15 quarters. Industrial growth too had slowed, and after being in the negative is just showing signs of recovery. The price situation is not much better either. While wholesale price inflation nudged up to 6.8 per cent (reflecting the petrol price hike) in February against 6.6 per cent in January, consumer price inflation hit 10.91 per cent last month.
India Inc expects more
While the RBI’s action was generally welcomed, India Inc clearly had expected more.
“Industry is looking for reduction of key policy rates by 50 bps so that the fiscal measures already taken by the government and reform process on the high adds to the revival of the growth momentum,” Assocham President Rajkumar N. Dhoot said.
CII President Adi Godrej said with the nascent signs of upturn in industrial production and expectations of a normal monsoon, “it is necessary that the RBI provides the boost to green shoots of recovery.”