To halt growth slump, RBI cuts CRR, repo rate by 25 bps

The Reserve Bank of India on Tuesday cut its key policy rates — repo rate and the cash reserve ratio — by 25 basis points each.

Justifying the softening of its monetary policy stance, the RBI said it is critical now to arrest the loss of growth momentum without endangering external stability.

While the 25 basis points cut in repo rate (the interest rate at which the central bank lends overnight funds to banks to tide over temporary liquidity deficit) was along expected lines, the cut in cash reserve ratio (CRR) was a bit of a surprise.

The repo rate has been reduced from 8 per cent to 7.75 per cent with immediate effect.

The CRR (the slice of deposits that banks have to park with the RBI) cut from 4.25 per cent to 4 per cent, historically the lowest level, will free up Rs 18,000 crore for banks to lend.

These cuts set the stage for banks to cut their minimum lending rate, making loans to retail, micro, small and medium enterprises, and large corporate segments a tad cheaper.

Depending on their liquidity position, banks may also cut deposit rates with a lag.

IDBI Bank was first off the block and cut its base rate as well as its benchmark prime lending rate by 25 basis points each to 10.25 per cent (from 10.50 per cent) and 14.75 per cent (from 15 per cent), respectively. The public sector bank also cut retail term deposit rates in select buckets by 25 basis points.

India’s largest bank, State Bank of India, is expected to take a call on lending and deposit rate cuts at its asset-liability committee meeting tomorrow.

RBI Governor D. Subbarao said, “We are in relentless pursuit of higher growth and lower inflation.” He said that if inflation and current account deficit moderate further there will be more room for monetary policy easing. However, if they go along the currently expected lines the space for monetary policy easing is quite limited.

Bankers’ feedback

On whether banks would cut rates, Subbarao said bankers were more forthcoming and assuring than before about the transmission taking place through lending rates.

On deposit rates, however, the signal was not uniform. While some bankers said deposit rates might come down, others said there was not much room for it.

Bankers expressed concern that there was flight of savings to the non-banking space and also substitution of savings in banks by purchase of gold. Some bankers also said that margins will come under pressure.

GDP, inflation estimates

Given that it will take some time to reverse the investment slowdown and reinvigorate growth, the RBI has pared its GDP growth projection for FY 2012-13 to 5.5 per cent from its earlier projection of 5.8 per cent. It also revised the Wholesale Price Index-based inflation projection for March 2013 to 6.8 per cent from 7.5 per cent earlier.

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