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The RBI chose not to oblige the government or the market expectations of a cut in key policy rates.
Post the reform measures unveiled over the past month and the five-year fiscal consolidation plan released on Monday, the expectation in the Government was the Reserve Bank of India would cut key rates. But the RBI only cut the cash reserve ratio (CRR) by 25 basis points to 4.25 per cent from 4.50 per cent. This measure is expected to release Rs 17,500 crore into the system.
Still worried about inflation, the RBI maintained status quo on repo rate, leaving it unchanged at 8 per cent — the same level it has been at for the past six months.
Will the CRR cut lead to interest rate cuts by banks? Not immediately. That’s the sense one got from top bankers such as Pratip Chaudhuri, Chairman, State Bank of India; Chanda Kochhar, Managing Director, ICICI Bank; and Aditya Puri, MD, HDFC Bank, who addressed the media immediately after their interaction with RBI Governor D. Subbarao.
They were ‘unpleasantly surprised’ by the higher provisioning requirement (2.75 per cent on standard restructured loans) and that took away the positive effect of the CRR cut. SBI, for instance, is expected to gain about Rs 225 crore through the CRR cut but will have to set apart Rs 300 crore on higher provisioning requirements.
Although Chaudhuri kept his options open, others were clearly less enthusiastic about cutting rates. Retail customers looking for another round of cuts in home loan or car loan rates may have to wait a few more months. The markets reacted to the RBI policy with disappointment. While the broader market sentiment was weak, reflected by the 1.1 per cent drop in the BSE Sensex, the BSE Bankex dropped 2.35 per cent (310 points).
The rupee was, however, marginally up and closed a shade higher at 53.97 to the dollar after a weak beginning.
The 10-year government bond traded at 8.18 per cent, down 5 basis points. The RBI Governor said, in an interview to Business Line, that he did not cut the repo rate “because a cut at this time may dilute the RBI’s anti-inflationary stance”.
Balancing the current growth and inflation situation needed a calibrated approach which would support growth, easing of supply constraints but at the same time helping ease inflation, he said.
The RBI said in its guidance, “The reduction in the CRR is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth. It anticipates the projected inflation trajectory which indicates a rise in inflation before easing in the last quarter. While risks to this trajectory remain, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13. The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic.”
The RBI has pared its GDP growth forecasts through successive quarterly reviews The latest GDP forecast for this fiscal is 5.7 per cent growth for the fiscal while WPI inflation is projected to be 7.5 per cent for March 2013.
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