Rating agency ICRA does not expect banks to sharply reduce interest rates on deposits in the near term.

Banks could start to pass-on the benefit of lower policy rates to borrowers from the first quarter, although to a limited extent.

Non-food credit growth

In its comments on the RBI annual policy, it said the expected 17 per cent growth in non-food credit is lower than the growth in FY12. This indicates that the demand recovery could remain modest.

While the policy stance is likely to be relatively dovish, ICRA expects the RBI to remain cautious regarding slippages from inflation and fiscal targets.

In line with the guidance that headroom to ease monetary policy further is limited, ICRA expects further rate cuts this financial year be limited to 25 basis points.

The raised two per cent allowed for MSF (marginal standing facility) borrowing could provide some headroom for banks facing tight liquidity. This is likely to reduce the volatility in call rates.

Systemic liquidity

Overall, the systemic liquidity deficit could ease marginally in Q1 but continue to remain outside RBI’s comfort zone.

The Government borrowing programme of Rs 3.7 lakh-crore in the first half-year would keep systemic liquidity tight. This could warrant open market operations or further reduction in the cash reserve ratio (CRR).

'A bold move'

Mr Ashvin Parekh, National Leader, Global Financial Services, Ernst&Young , said the large rate cut by 50 basis points is certainly a bold move by the regulator. However, it is also a recognition that prolonged hard policy stance could have unwanted implications in the absence of fiscal policy support.

The economy as a whole will heave a sigh of relief especially for sectors like infrastructure, retail and real estate. The banking system will also breathe easy as the portfolio quality will now start to improve.

Food inflation

Headline inflation is now around comfort zone but the risks remain especially in food inflation and we may see sharp spikes throughout the year.

Banks may pass on some relief to distressed sectors. Banking system is a bit stretched on the liquidity front with a deficit of 1.7 per cent and rupee depreciation remains a concern.

Regulatory focus would now shift to balance moderate inflation with moderate growth from the low inflation policy earlier, Mr Parekh said.

A bit of a surprise

Mr Indranil Pan, Chief Economist, Kotak Mahindra said rate cut was a bit of a surprise.

“We were expecting the RBI to cut its policy rate by 25 bps only, given the continued hawkish tone on inflation,” he said.

However, the RBI preferred to throw the gauntlet and address the concerns of slowing growth, thereby overriding the concerns of inflation management for the moment.

“In my opinion, the RBI has not fully let down its guard on inflation and the risks of it arising again in the future,” Mr Pan said.

The RBI hopes that the Government will now play its part in containing the fiscal by keeping a check on subsidies, thereby helping reduce aggregate demand.

Corporate pricing power

Further, the RBI had been noting for some time that corporate pricing power had been coming off. This is clearly indicative of demand contraction on the back of monetary policy actions of the past.

Ms Tanushree Majumdar, Senior Economist, NCDEX, said that the RBI had in the last quarterly review indicated an end to the interest rate hike cycle.

Therefore, a decisive 50 basis point cut in repo rate is not much of a surprise especially given that growth is on a slippery track.

The RBI also preferred to avoid using the CRR perceived to be a blunt instrument and used the MSF instead, a more subtle way of providing liquidity support.

But unless the overall policy environment increases, business confidence is unlikely to get much of a boost from the RBI’s bold policy move.

>vinson@thehindu.co.in

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