Markets have transmitted the RBI's past policy actions via commercial paper and corporate bonds, but the median base lending rates of banks have fallen by only about 30bps, which is just a fraction of the 75bps rate reduction during January-June, RBI Governor said
The Reserve Bank of India (RBI) on Tuesday cut repo rate (the rate at which the RBI lends money to banks) by 50 basis points to 6.75% from 7.25% with immediate effect. At the same time, the central bank has made a pitch for passing the rate cut on to consumers in the form of cheaper personal and commercial credit. The cash reserve ratio (CRR) has been kept unchanged at 4% in the fourth bi-monthly policy review by RBI.
In a statement, RBI Governor Dr Raghuram Rajan said, "While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed."
The rate cut is in line with the expectations from the India Inc. Industry was of the opinion that the upcoming review might be the last chance to cut rates this calendar year before inflation spirals up, also because the review comes just after the US Fed's decision not to hike its own rates due to global economic uncertainty. "Today’s action by the RBI has removed considerable uncertainty with regard to the direction of borrowing costs faced by industry. The corporate sector will now be in a better position to drive a recovery in investment and growth," says Chandrajit Banerjee, Director General, CII.
Dr Rajan also expressed displeasure over banks not passing the benefits of rate cuts to customers. He said, "Markets have transmitted the Reserve Bank’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent. The median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions. This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank. Bank deposit rates have, however, been reduced significantly, suggesting that further transmission is possible".
After the announcement, State Bank of India (SBI), country’s largest commercial bank has cut its base rate by 40bps to 9.30% from 9.70% from 5 October 2015. "Overall, the policy announcement has a slew of positive surprises with the most notable being the projection of a benign inflation trajectory even throughout FY17 and reaffirmation of a continued accommodative policy. The increase in FPI limit and the reduction in SLR & HTM will counterbalance each other. The proposal to reduce the risk weights on low cost housing loans will incentivise the banks," said Arundhati Bhattacharya, Chairman of SBI.
RBI said, in India, a tentative economic recovery is underway, but is still far from robust. In agriculture, sown area has expanded modestly from a year ago, reflecting the timely and robust onset of the monsoon in June, but the southwest monsoon is currently deficient by 14% – with production-weighted rainfall deficiency at 20%. Nevertheless, the first advance estimates indicate that food grain production is expected to be higher than last year, reflecting actions taken to contain the adverse effects of rain deficiency through timely advisories and regular monitoring of seed and fertiliser availability. Allied farm activities, which are more insulated from the monsoon, remain resilient and this could partly offset the effects of adverse weather on crop production. Rural demand, however, remains subdued as reflected in still shrinking tractor and two-wheeler sales.
"The onus is now on the government to remove impediments to transmission while following a prudent fiscal path, and for banks to pass on the rate cut. Plus the RBI has also set the CPI inflation target at ~5% by end 2016-17 and reiterated it at 4% by end 2017-18. Therefore, the pause from hereon could be a prolonged one unless there is a significant positive surprise on inflation, " said ratings agency CRISIL.
The reverse repo rate under the liquidity adjustment facility (LAF) will be changed to 5.75%, and the marginal standing facility (MSF) rate and the bank rate at 7.75% with immediate effect.
Reverse Repo Rate..........5.75%
Concept paper for proliferation of card acceptance infrastructure
RBI said, with growing financial inclusion, there are concerted efforts to enhance the use of technology and move towards a “less-cash” society. In order to promote electronic payments and use of cards for transactions, the Reserve Bank will put in the public domain a concept paper for proliferation of card acceptance infrastructure in the country, especially in the tier III to tier VI centres, by end-November 2015.
According to Bhattacharya, the decision to circulate a concept paper for increased usage of cards is a step in the right direction for a cashless society in quest for a digitised India.