The much-awaited Reserve Bank action's is here at last. The central bank has cut the repo and reverse repo rates by 50 basis points with immediate effect. Bankers and industry leaders have cheered the rate cut, but most feel the move should have come earlier. They feel the cut in reverse repo rate will force banks to lend more to industry which is badly in need of funds.
Vice-Chairman and MD of HDFC, Keki Mistry feels there are two reasons for RBI to cut rates. "One, inflation is down to a real low. So by the time we get to June, one would probably look at a negative inflation number because of the base effect. The second factor could be the low GDP growth that we saw in the last quarter."
He feels the reverse repo rate cut is more relevant than RBI's repo step. "Currently, there are not too many banks that are borrowing under the repo window because there is so much liquidity in the system. So, everyone is parking money back to RBI through the reverse repo window. Hence, the reduction in the reverse repo is more relevant than the reduction in the repo rate because this means that there will be a further disincentive for banks to just go and park the money with RBI. It will mean that banks will be more willing to go out and lend money to industry, which is the need of the hour."
Chief Economist at the JP Morgan Chase, Jehangir Aziz said the banking sector required the signal that not only liquidity but also policy rates would be kept low and monetary easing will be continued to be provided to the economy.
Chairman of UCO Bank, SK Goel said by reducing the repo rate, RBI has shown that banks should have sufficient liquidity to finance the increase of demand during March and April. "Also, banks can borrow funds at cheaper rate, at least by 50 bps. If the banks pass on the benefit to the consumer, the banks can lend this money at a lesser rate at least by cutting their lending rate to 50 per cent."
Chief Economist at Crisil, DK Joshi said there will be further rate action but it would be in smaller steps. "We won’t see the aggression that we saw last year. We will see a 50 bps rate cut again before April because the global economy is slipping and also its impact of the domestic economy is being felt more now. RBI had in its earlier policy review said the downside risks to the economy remain. This is a clear manifestation of downside risk what the GDP numbers released a couple of days back showed. I think the RBI has to keep acting. The other problem before the RBI is that despite its signal, the general interest rates are not coming down. I think that will remain a challenge going ahead because I don’t foresee lending rates coming down very quickly. It is still very sticky."
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