RBI cuts repo, reverse repo rates by 50 bps

RBI cuts repo, reverse repo rates by 50 bps
The Financial Express, March 5, 2009, Page 1

fe Bureau

The Reserve Bank of India reduced the repo and reverse repo rates by 50 basis points each on Wednesday, but industry said its effectiveness would depend on how well banks use the cheaper money to provide more credit to an economy rapidly losing steam. While Bank of India said it could take weeks to decide on lowering prime lending rates, UCO Bank announced a reduction in its benchmark by 50 basis points to 12.50%.

The money and stock markets had factored in the rate cuts for some time, but they are not expected to sustain a rally. A CII statement said another 50-bps cut would have been more appropriate. Nevertheless, industry captains are hopeful. Said Binani Cement MD Vinod Juneja, “The cut will boost demand for cement as housing loans are now expected to become cheaper and affordable. This will boost housing demand, in turn improving demand for steel and cement.”

General Motors India vice-president P Balendran echoed that sentiment. “Interest rates on auto loans will come down further. This will improve liquidity in the system and consequently volumes are expected to go up further,” he said. Sumit Bali, CEO of Kotak Mahindra Prime, which is major player in the auto lending business, said he expected interest rates for autos to be reduced by a minimum of 25 bps. “We will decide on the exact reduction in a day or two.”

This is the fifth time that RBI has slashed rates since October 2008, when the global economic crisis broke out. The repo rate—the rate at which banks buy cash from RBI—is now at 5%. To reduce the incentive for banks to park excess cash with RBI, the reverse repo rate has been cut to 3.5%, both with immediate effect.

Governor D Subbarao said, “It is expected that the reduction in the policy interest rates will further encourage banks to provide credit for productive purposes at viable interest rates. RBI, on its part, would continue to maintain ample liquidity in the system.”

An RBI statement took note of the huge dip in the economy’s Q3 growth rate to 5.3%—the lowest in five years: “Even as some public sector and private sector banks have cut lending rates in response to RBI’s monetary policy stance, concerns over rising credit risk, together with the slowing of economic activity, appear to have moderated credit growth.” In the meantime, the fiscal deficit has ballooned to over 6% of GDP and the rupee has slipped to less than 52 against the dollar.

All the economic indicators have taken a downturn, RBI acknowledged. Exports contracted for four consecutive months, October to January, while the latest figures show factory output has contracted by 2%. WPI-based inflation, though, has eased to 3.36% for the week ended February 14.