Soon after the Reserve Bank cut CRR rates by 25 bps to 4.5% in it’s the monetary policy, several bankers hinted that they may reduce lending rates in the coming days
Borrowers could see better days ahead as banks are expected to cut lending rates following the Reserve Bank of India (RBI)'s decision to unlock Rs17,000 crore by slashing cash reserve ratio (CRR) by 0.25%, reports PTI.
Soon after the Reserve Bank unveiled its mid-quarter review of the monetary policy, several bankers hinted that they may reduce lending rates in the coming days.
Commenting on RBI's action, Pratip Chaudhuri, chairman of State Bank of India (SBI) said the bank will review its rates in the light of policy decision. The asset liability committee (ALCO) of bank is expected to meet soon to take a view on rate revision.
"It is a very positive move. I think the RBI has given a clear signal that they (banks) are willing to respond and that they (banks) have taken note of the signs of deceleration in economy," Chaudhuri said.
RBI today announced cut in CRR, the percentage of deposits banks keep with central bank, to 4.5%.
However, repo rate, at which the central bank lends to the banks, would remain unchanged at 8%. The reverse repo, at which it absorbs excess liquidity through borrowings from banks, remains at 7%.
Terming the policy action strongly positive for the markets, MD Mallya, Chairman and Managing Director of Bank of Baroda said as much as Rs720 crore of additional fund would come to the bank.
The liquidity infusion would ensure adequate flow of credit to productive sectors of the economy, Mallya said, adding that the bank's ALCO would meet soon to take stock of the situation.
Oriental Bank of Commerce (OBC) Chairman and Managing Director SL Bansal also said that the bank would take a view on the rate revision in its ALCO meeting soon.
"I am of the opinion that there will be fall in the interest rate," Bansal said, adding that the lending rate would moderate further.
OBC has already cut its base rate or the minimum lending rate by 0.1% to 10.4% last month.
According to MV Tanksale, Chairman and Managing Director of Central Bank of India, the CRR cut will infuse Rs515 crore into the bank. He said, however, that he did not anticipate cut in the base rate. There could be moderation in certain segments, he added.
Credit growth is expected to pick up during the upcoming festival season, Tanksale said.
On the similar lines, Dena Bank Chairperson Nupur Mitra said the bank will decide about base rate cut in the committee's meeting. RBI's action will definitely help in the credit growth, she added.
Indian Overseas Bank (IOB) Executive Director AK Bansal said, "We will take a call in ALCO soon taking into consideration liquidity condition and credit off-take."
If credit picks up further from here on, he said, there is a possibility of moderation in the interest rate.
It was not a surprise that RBI maintained status-quo on policy rates and provided a token 0.25% cut in CRR, said Moses Harding, IndusInd Bank head (ALCO and economic & market research).
It was a balancing act with one eye on inflation and the other on the government's action on pushing reforms, and fiscal consolidation, he said.
"The shorter end of the rate curve will benefit the most while medium to longer is expected to stay steady," Harding said.
The government should take bold steps in addressing problems related to fiscal deficit, current account deficit, inflation and slowdown in corporate investment. This is the only route to improve market sentiment, says Nomura Equity Research
On the balance, Nomura expects the market rally to fizzle out in due course of time, primarily because the global liquidity glut would likely push up global commodity prices as well, which would worsen India’s twin-deficit problem and raise inflation expectations across the board.
The government policy in India and abroad is fuelling the current rally. The government is defensive because of Coalgate. It has been bolder with respect to the diesel price hike and the opening up of FDI in multi-brand retail, civil aviation and power. The Federal Reserve’s QE3 (third round of quantitative easing) policy is also brave. The ECB’s OMT (outright monetary transactions) lowers financial risk. The rally in markets could also be followed by a rally in the rupee if the capital flows come in strong on improved market sentiment.
Nomura predicts that the market may rally in the short-term, given the facts that dedicated investors are mostly defensively positioned; and Nomura’s feedback from ‘long-only’ investors suggests an across-the-board underweight position on India.
Nomura’s market predictions for the medium term include: (a) It suggests buying banks, real estate and metals as insurance against a beta rally; (b) It thinks that problems besieging the infrastructure sector have not been sorted out in the least, as yet; (c) Nomura feels that inaction of the past few years means that a quick turnaround in the investment cycle would be close to impossible; (d) Nomura thinks that the window of reforms would close in about a couple of months with key impending elections in the states of Gujarat and Himachal Pradesh.
Nomura’s predictions are in the light of the three key overhangs on the economy in India which include:
(a) Fiscal deficit – diesel price hike of Rs5 per litre is insufficient to rein in fiscal deficit. This problem is far from over until the next Union Budget;
(b) Current account deficit – with greater liquidity and a weaker dollar fuelling the rise in global commodity prices, the trade deficit would likely come under further pressure in the coming months. Improved domestic market sentiment may boost FII inflows in both debt and equity, leading to a short-term fix in balance of payments;
(c) Inflation – the potential strength in global commodity prices also means that inflation is likely to surprise negatively in the coming months.
Government leadership is required in policy-making with respect to:
(a) investment slowdown to be addressed, which is due to issues hampering infrastructure and corporate capex; and
(b) commitment to fiscal rectitude—important in the context of general elections in 2014. The government should be cautious on its policy towards subsidies.
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