Headlines
India's central bank marginally lowers lending rate
Mumbai, June 2
Giving in to overwhelming
demands for an easing of the monetary policy, the Reserve Bank of India
(RBI) on Monday lowered its short-term lending rate by 25 basis points
in a move that could potentially reduce the cost of borrowings on
personal and corporate loans.
In his bi-monthly monetary policy
review for the current fiscal year at the RBI headquarters here on Mint
Street, Governor Raghuram Rajan said the repurchase rate has been
lowered to 7.25 percent on the basis of an assessment of the current and
evolving macroeconomic situation.
Prior to the review, the repo
rate -- the interest rate which the central bank levies while lending
short-term funds to commercial banks -- stood at 7.5 percent.
"Consequently,
the reverse repo rate under the liquidity adjustment facility (LAF)
stands adjusted to 6.25 percent and marginal standing facility (MSF)
rate and the bank rate to 8.25 percent," the governor said.
The
cash reserve ratio (CRR), the quantum of funds commercial banks have to
keep in the form of cash or government bonds, has been left unchanged at
4 percent of deposits.
"Our policy is neither too conservative,
nor too aggressive -- but just right for the given moment," Rajan said
at a post-review press conference, and made it clear that he would like
to see the commercial banks passing on the rate cuts down the line.
Thus
far in this calendar year, the Reserve Bank has cut its lending rate by
75 basis points. But for this to translate into lower interest rates
for personal, housing, automobile and corporate loans, commercial banks
also have to initiate such an action.
As soon as the statement
was updated at 11 a.m., the sensitive index (Sensex) of the Bombay Stock
Exchange (BSE) took a dip of over 200 points. At that point, the
intra-day fall was as much as 450 points. Half an hour later, the index
was ruling with a loss of 360 points or 1.3 percent.
Giving the
reasons for the policy stance, Rajan said plans for lower food output
needed to be in place, global financial markets were volatile, factory
output was recovering unevenly, services sector was emitting mixed
signals, fuel inflation was up, exports were down and liquidity had
improved.
In the calendar year thus far, the central bank has
twice cut the repo rate over two unscheduled monetary policy reviews --
in January and March, bringing it down to 7.5 percent. But during the
scheduled reviews in February and April, no changes were effected.
In
April, Rajan said banks have to pass on the previous rate cuts, and
dismissed claims that cost of funds remained too high. At Tuesday's
press conference, Rajan said banks had slowly started to lower interest
rates, but the pace was not fast enough.
Ahead of the policy
update, while the underlying expectation was for a 25 basis points cut
in the lending rates, stakeholders hoped the RBI would spring a surprise
by lowering its interest rate by 50 basis points.
Rajan said
that the central bank will keep an eye on how monsoon progresses and the
steps taken by the government to mitigate its negative effects.
"There
have been El Nino in the past as well, like the deficient rainfalls in
2002-03, but the prices were stable and kept under control due to the
government's steps," Rajan said.
"There are ways in which the government can step in, like buffer stocks or imports of commodities such as pulses," Rajan said.
The inflation levels for January 2016 have also been hiked to six percent from an earlier estimate of 5.8 percent.
On
the revival of investment demand, he said there is a need for
"unclogging" of stalled investment projects, stabilising of private new
investment intentions, and improving sales of commercial vehicles.
"Industrial
production has been recovering, albeit unevenly. The sustained weakness
of consumption spending, especially in rural areas as indicated in the
slowdown in sales of two-wheelers and tractors, continues to operate as a
drag. Corporate sales have contracted," Rajan said.
He said the "disappointing earnings performance" could have been worse if not for the decline in input costs.
The
governor added that the first set of new banking licences will be
issued by August, taking the number of such private financial
institutions operating in the country to more than 12.
India's
central bank has licensed 12 banks in the private sector in the last two
decades, of which 10 were licensed on the basis of guidelines issued in
January 1993.