Contrary to the expectations of bankers and economists the RBI cut repo rate and bank rate by 50 basis points. This may lead to lower interest rates for home loan, auto loan and corporate loans
The Reserve Bank of India (RBI) on Tuesday surprised everyone by cutting the repo rate and bank rate by 50 basis points (bps) as against the overall expectations of a 25 bps reduction in its annual credit policy. This is the first time after a gap of three years that the central bank has reduced repo rates. 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 a moderation in core inflation, the RBI said. The cut in repo rate will reduce cost of home, auto and corporate loans.
Barclays Capital, in a note, said, "In our view, the RBI's guidance suggests that it has merged a couple of "baby steps" into today's move and will possibly stay on hold for awhile. We believe the central bank will examine the scope for further monetary easing on a case-by-case basis in the coming months, with a bias towards not cutting the repo rate further in the next one to two policy meetings."
The central bank in its monetary policy for 2012-13 cut the repo (the rate at which the RBI lends money to banks) rate to 8% from 8.5% and bank rate to 9% from 9.5%. It, however, left the cash reserve ratio (CRR) unchanged at 4.75% while the reverse repo rate (the rate at which the RBI borrows from banks), with a window of 100 bps with repo rate, automatically stands adjusted at 7%.
RBI, in a release, said it decided to raise the borrowing limit of scheduled commercial banks under the marginal standing facility (MSF) from 1% to 2% of their net demand and time liabilities (NDTL) outstanding at the end of second preceding fortnight with immediate effect.
Indicating that there is limited space for further reduction in policy rates, the central bank said, “Persistent demand pressures emerging from inadequate steps to contain subsidies as indicated in the recent Union Budget will further reduce whatever space there is. In this context, it must be pointed out that, while revisions in administered prices may adversely impact headline inflation, the appropriate monetary policy response to this should be based on whether the higher prices translate into generalised inflationary pressures.”
“By shifting a stance towards favouring growth and cutting repo rate by 50 bps at a one go, RBI has certainly come up with the trick that is actually required at the moment. However, risks to inflation discussed in the macroeconomic report are some of the concerns that may act as a hurdle in the course of loosening of monetary policy,” said DK Aggarwal, chairman and managing director of SMC Investments and Advisors.
Speaking on effects of the RBI policy on real estate, Om Ahuja, chief executive for Residential Services at Jones Lang LaSalle India, said, "We do expect that there will be a marginal increase in home loan borrowings because of this positive move. That said, the series of hikes in the past have also affected the price that builders put on their properties, since their own cost of borrowing has increased. It is unlikely that property prices will come down because of this rate cut, and it is the price of properties that is the decisive factor in residential real estate sales. In fact, it is very likely that there will be an upward bias on property rates because of the anticipated improvement of sentiments with buyers who have so far been sitting on the fence, waiting for some signals of relief."
Last month, the RBI slashed CRR—the percentage of deposits that banks have to keep with the RBI—from 5.5% to 4.75%. With this, the central bank had infused Rs48,000 crore into the economy. Showing persistent sluggishness in the economy, industrial production growth slowed to 4.1% in February this year, mainly due to poor performance of the manufacturing sector and consumer goods segment.
At the same time, inflation has been hovering around 7% and global crude oil prices are still over $100 per barrel, adding to inflationary pressures. Inflation was 6.89% in March much above the RBI's comfort level.
Mushtaq Ahmad, chairman, Jammu & Kashmir Bank, said, "When we are expanding our corporate and SME loan book outside the J&K State, the rate cut scenario will allow us generate volumes, customer base and remain competitive. We will be happy to pass on the benefit of cut to borrowers. Though seemed temporary, the initiative is an act of re-balancing towards checking inflation.”
RBI, which increased the key policy rate 13 times between March 2010 and October 2011 to tame inflation, did not hike the repo rate (short term lending rate) in the last three policy reviews.
On the other hand, India's GDP grew by the slowest pace in the last three years to just 6.1% in the third quarter of 2011-12.
The GDP growth rate for the third quarter was lower compared to 6.9% in the previous quarter and 8.3% in the same quarter last financial year.
Since October 2011, the repo of RBI has stood at 8.5%. Repo rate is the signalling rate. Other policy rates like reverse repo and bank rate adjust automatically with change in the repo rate.
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% 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 pre-payment 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.
The followings are the highlights of the Annual Monetary Policy for 2012-13 announced by RBI Governor D Subbarao on Tuesday...
Pune Cantonment Board’s reply to RTI application says that the cantonment comes under the jurisdiction of the Maharashtra Tree Act. Was this Act thrown out of the window for the President?
At least 20 stalwart trees more than 100 years old and several other trees have been massacred to make way for the palatial post-retirement bungalow of President Pratibha Patil on 2,42,000 sq ft of prime land in Kirkee Cantonment in Pune, which skirts the Pune-Mumbai highway.
The green landscape before...
By its own admission to a RTI (Right to Information) query by noted Pune-based tree activist, Vinod Jain, the Pune Cantonment Board has specifically replied that, “The Maharashtra (Urban Areas) Protection and Preservation of Trees Act, 1975 applies to Pune Cantonment Board...”
Hence, says Maj Gen SCN Jatar, a prominent RTI activist of Pune who had fought tooth and nail when the Pune Cantonment Board decided to increase the FSI within its limits, “The prevailing law is clear that the felling of trees for the proposed residence of the President on her retirement should have had the approval of the Tree Officer. The Kirkee Cantonment Board should have obtained the permission either from the Tree Officer of the Pune Municipal Corporation (PMC) or of the Pimpri-Chinchwad Municipal Corporation (PCMC). In the instant case, whoever cut the trees did not obtain any of the permissions as per law.”
On Monday, Col Suresh Patil (retd), Comm Ravindra Pathak and former naval officer Anup Awasthi ran from pillar to post to find out whether permission was given to fell these trees. “We came to know of the damage of the trees when Moneylife’s story on President grabbing the land went viral and we rushed to the spot with the media channels.” Finally, Mr Awasthi filed a RTI application with the Pune Municipal Corporation as well as the Pune Cantonment Board late Monday.
When trees were cut to make way for construction...
Col Patil states that Principal Director, Defence Estates is also responsible for not taking any action. He states, “Despite merciless tree cutting, there seems to have been no legal action taken. We are going to first question him about what kind of permission was given to fell the stalwart trees. Secondly, as per the law, the local military authority has to auction them officially and deposit the revenue in the treasury. Has it done that?”
According to Chapter I, Section 1 (2) of The Maharashtra (Urban Areas) Protection and Preservation of Trees Act, 1975 (as modified up to 3 November 2006), the Act “extends to the whole of the state of Maharashtra”. Hence, President Patil’s bungalow cannot be an exception even if it is on defence land, says Maj Gen Jatar.
The barren land and building that was once full of lush green cover...
The point is who will bell the cat?
• As per Chapter V (Restriction of Felling of Trees and Liability for Planting and Preservation of Trees), Section 8 (1), “On and after the date on which this Act is brought into force in any urban area, notwithstanding any custom, usage, contract or law for the time being in force, no person shall fell any tree or cause any tree to be felled in any land, whether of his ownership or otherwise, situated within that urban area, except with the previous permission of the Tree Officer”
• Section 21 of the Act reads, “[(1)] Whoever fells any tree or causes any tree to be felled in contravention of the provisions [of the Act] or without reasonable excuse fails to comply with any order issued or condition imposed [by the Tree Officer or the Tree Authority or voluntarily obstructs any member of the Tree Authority or the Tree Officer or any officers and servants subordinate to him in the discharge of their functions under this Act, shall, on conviction, be punished with the fine of not less than Rs1,000 which may extend up to Rs5,000 for every offence and also with imprisonment for a term of not less than one week, which may extend up to one year
• [(2)] The felling or causing of felling of each tree without the permission of the Tree Authority shall constitute a separate offence.]
• In a judgment in PIL 93 of 2009 dated 17 June 2009, the Bombay High Court has ruled, “…By way of ad interim order we direct the respondent municipal corporation not to permit felling/cutting the trees within the municipal limits of Pune Municipal Corporation without obtaining approval of this Court.”
(Vinita Deshmukh is a consulting editor of Moneylife. She is also an RTI activist and convener of the Pune Metro Jagruti Abhiyaan. She is the recipient of prestigious awards like the Statesman Award for Rural Reporting which she won twice in 1998 and 2005 and the Chameli Devi Jain award for outstanding media person for her investigation on Dow Chemicals. She co-authored the book “To The Last Bullet - The Inspiring Story of A Braveheart - Ashok Kamte” with Vinita Kamte. She can be reached at [email protected])