Mumbai, Feb. 3: Reserve Bank of India governor Raghuram Rajan today decided to hold interest rates steady and pumped Rs 45,000 crore into the financial system by relaxing a key reserve requirement for banks even as he tried to goad recalcitrant lenders to trim their lending rates in response to the repo cut in January.
The repo is the rate at which the RBI provides short-term funds to banks.
At its sixth bi-monthly monetary policy review, the central bank expectedly chose to leave the repo unchanged at 7.75 per cent - drawing a volley of protest from India Inc, which has been pressing for an accommodative monetary policy.
However, the statutory liquidity ratio (SLR), or that portion of bank deposits that must be invested by banks in government bonds, was reduced by 50 basis points to 21.5 per cent. The SLR cut is expected to swell liquidity in the financial system by Rs 45,000 crore.
The RBI had cut the repo rate on January 15 by 25 basis points. It had expected banks to pass on the relief to its home and auto loan borrowers, but only a few actually went ahead and reduced their benchmark rates.
"Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank of India to await them and maintain the current interest stance," the central bank said in a statement.
"Many banks have been relatively quick to cut their deposit rates, but not so quick to cut their lending rates... I think it is the pressure of competition that will eventually force them to pass through these cuts. So let us wait and see," Rajan told reporters.
Rajan said the central bank would like to wait for a steady stream of new growth numbers after the change in the base year and signs of fiscal consolidation in the Union budget later this month before deciding on further rate cuts. But auto makers and realty players - who have been struggling amid the slowdown - were most upset with the failure to lower rates.
"We were anticipating a rate cut of at least 75 basis points as it would have improved customer sentiment ahead of the budget," said P. Balendran, vice-president of General Motors India.
CII president Ajay Shriram hoped that the RBI would "resume its accommodative monetary policy stance in the next policy review and work in tandem with the government to bring the investment momentum back to the economy." He added that the CII expected a 100-basis-point reduction in headline interest rates in the course of the year.
"We see the need for a cut of at least another 75 basis points during 2015 and its effective transmission by the banks to industry in the form of lower lending rates to boost growth," Ficci said.
Economists and bond market players feel that the central bank could bring down the policy rate next month by 25 basis points if the fiscal steps proposed in the budget meet its expectations and the disinflationary process continues.
Rajan did not rule out the possibility of another cut between two scheduled monetary policy reviews even as he said that the RBI was in favour of a 1.5 to 2 per cent real rate (difference between retail inflation and policy rate) given the current business cycle.
The RBI expects retail inflation to be around the target level of 6 per cent by January 2016. It retained India's GDP growth (using the old base) at 5.5 per cent for 2014-15. The estimate of the current account deficit for 2014-15 was put at 1.3 per cent of GDP, much lower than earlier projections.
When asked to comment on the new methodology for calculating GDP, Rajan said the RBI would prefer to wait for fresh data to be released on February 9.
"At this point it is premature to take a strong view based on the GDP numbers. Most of data for 2013-14 gave us a sense that there was slack in the economy. We find it hard to believe that the economy was rollicking in 2013-14. However, it could be that services grew stronger during that period. India is moving more towards consumption of services than manufacturing," added Rajan.
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