Three days after Finance Minister Arun Jaitley presented a growth-oriented Budget, the Reserve Bank of India on Wednesday came up with a complementary move by cutting the key policy rate by 25 basis points from 7.75 per cent to 7.50 per cent.
This is the second time in as many months that the central bank has cut the repo rate, that is, the rate at which it provides short-term liquidity to banks. Both the times it has done so outside the policy review cycle. The repo rate was last cut from 8 per cent to 7.75 per cent on January 15.
The rate cut lifted the Sensex, pushing it over the historic 30,000 mark within a few seconds of market opening. However, it soon fell back below the 30K mark. Later, profit-booking ahead of a long week-end pushed the stocks deep into the red. The Sensex tumbled 213 points to close at 29,380, snapping a four-day Budget rally.
Even rate-sensitive sectors such as banking, realty and auto stocks came under strong selling pressure.
Given that the rate is now down by 50 basis points this year, banks may announce simultaneous deposit and base rate cuts over the next week. But since banks are in the balance sheet closing period for the current financial year, these cuts are likely to be made effective from April 1. State Bank of India Chairman Arundhati Bhattacharya said her bank will take an appropriate call on a cut in base rate by looking at all evolving circumstances.
While a deposit rate cut will disappoint the savers, a lending rate cut will make loans, including those to housing, auto, micro, small and medium enterprises and large corporates, cheaper.
Explaining the rate-cut move, RBI Governor Raghuram Rajan, in a statement, said: “Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation.”
There are, he added, many important and valuable structural reforms embedded in the Budget which will help improve supply over the medium term. “In the short run, however, the postponement of fiscal consolidation to the 3 per cent target by one year will add to aggregate demand. The Government intends to compensate for the delay in fiscal consolidation with a commitment to an improvement in the quality of adjustment,” the Governor said.
The RBI move has enthused corporates, which have been clamouring for a rate cut. Ravi Uppal, MD and Group CEO of JSPL, said: “This is a step in the right direction and it will augur well for the industry if the central bank continues with its easy rate stance and cuts policy rates by 125 bps by the end of 2015.”