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Posted on Mar 20, 10:27AM | IBNS
New Delhi, Mar 19 : India Inc on Tuesday welcomed the Reserve Bank of India's (RBI's) decision to reduce its repo rate by 25 basis points.
"The decision of RBI to reduce repo rate by 25 basis points in its mid quarter Monetary Policy Statement, in response to the fiscal consolidation efforts made by the government, has sent a strong signal that the RBI and the government would work in tandem to bring growth back to the economy," said Adi Godrej, President, Confederation of Indian Industry (CII).
Godrej stated: "At a time when industrial production is showing nascent signs of an upturn, current account deficit is slated to drop on account of improved global conditions and there are expectations of a normal monsoon, it is necessary that the RBI provides the boost to green shoots of recovery."
He said: "The government has taken a number of measures over the last six months, including through the Union Budget to reign in the fiscal deficit. Core inflation has also been moderating and the conditions are conducive for the RBI to go in for the reduction in interest rate.
"However, CII was hoping that the RBI would go ahead with a 50 bps reduction in the repo rate to make a significant impact on investor sentiments."
"With weakening of global commodity prices including petroleum the present conditions present that opportunity to the RBI, since one of the key concerns in the past few months has been the impact of a rate cut on the increasing current account deficit.
"CII is hopeful that at the Annual Monetary Policy announcement which is due in six weeks time, the RBI would undertake a more aggressive rate cut to give growth a big boost," he said.
India Ratings & Research (Ind-Ra) said the RBI's policy repo rate cut by 25 basis points (bps) is in line with its expectation.
"While the headline inflation and current account threats of destabilising macro-economic fundamentals exist, the decline in core inflation and sluggish growth resulted in monetary policy stance shifting to growth. Ind-Ra expects 50bps-75bps monetary easing in FY14," said Ind-Ra.
The fiscal policy and monetary policy are now moving in tandem to address growth concerns. Fuel price reforms, especially in diesel, will continue to exert pressure on headline inflation. Ind-Ra expects core inflation to decline further, the agency said.
"A normal monsoon, the central government's policy initiatives through cabinet committee on investment, elimination of bottlenecks by faster project clearances and supportive roles by state governments (approval falling in their policy domain) will help revive growth and control inflation," it said.
Gaurav Mittal, Governing Council Member of CREDAI and Managing Director of CHD Developers Ltd., said, "We are extremely happy that RBI has taken cognizance of the needs of the industry and announced a 25 bps cut in the Repo Rate, bringing it to 7.5%This much awaited step will certainly boost liquidity in the market. The step is slated to be beneficial for both the buyers as well as the developers who have been struggling with cash crunch in recent times."
"This significant move would reduce the cost of funds to home buyers as well as developers as it will allow the banks to lower down the interest rates. This will ensure heightened property demand in the coming times. We thank RBI for this welcome step and taking into consideration the liquidity concerns of the sector," said Mittal.
Nirakar Pradhan, Chief Investment Officer, Future Generali India Life Insurance Co Ltd., said: "Today is a day of two Ps: Policy and Politics. Policy turned positive for the market with RBI cutting Repo rate by 25 bps to 7.5%, to support the Government's efforts of reviving growth.
"However, Politics turned negative as withdrawal of support by the DMK will create roadblocks for the government to push reforms. This will adversely impact the economic recovery."
Amar Ambani, Head of Research - India Infoline Limited (IIFL), said: "The RBI has obliged on the Government's call to the Central Banker to support its growth agenda by cutting Repo rate by 25 basis points. An improvement in trade deficit, drop in core inflation, achievement of 5.2% fiscal deficit and slowing growth prompted RBI to act. These front ended cuts in 2013 (50 bps in Repo and 25bps in CRR) are a welcome step and will help bring down interest rates in the medium term."
"Having said that, immediate monetary transmission on account of the Repo cut is difficult due to liquidity tightness in the system. One must bear in mind that deficit in the LAF window is significantly above Rs1trn. Ironically, deposit rates were increased in the last few months despite a Repo cut in January.
"Private banks did not pass on the benefit of policy rate and CRR cut while SBI reduced its base rate by mere 5 basis points. RBI will attempt to manage liquidity conditions through OMOs in the months ahead," he said.
Ambani said in its policy guidance, the RBI mentioned that headroom for further monetary easing remains limited.
"The key factors constraining policy easing being market adjustment of administered prices, stubborn food inflation and structurally high Current Account Deficit which may take time to correct posing challenges of financing it with stable flows," he said.
"Notwithstanding the notable decline in core inflation, RBI remains worried about the increasing wedge between the wholesale and consumer price inflation. The key culprit, food inflation, is likely to remain elevated and faces upside risks from populist increase in MSPs.
"The central bank expects headline inflation to be around current levels during FY14 due to sectoral demand-supply imbalances and ongoing upward revision in administered prices."
Ambani said, on the growth side, the central bank is perturbed by the sharp deceleration in services sector growth which has been the mainstay of overall growth.
"RBI reiterated its view that though lower rates are necessary, it may not be sufficient to revive growth in the absence of resolution of supply bottlenecks and improving governance around project implementation. This puts the responsibility of growth revival categorically on the Government," he said.
"In our view, the Central Bank is likely to cut the Repo rate by further 25 basis points only in the remainder of 2013. Key risks to our view would be material moderation in food inflation in second half of the year and constructive steps by the government to reinvigorate private investments and reduce the Current Account Deficit.
"We expect RBI to keep rate unchanged in the annual monetary policy review on May 3," he said.
The RBI reduced its repo rate by 25 basis points on Tuesday for the second time this year based on the assessment of the current macroeconomic situation and to boost growth, but said the headroom for further monetary easing remains quite limited.
The RBI said it is reducing the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75 per cent to 7.5 per cent with immediate effect;
Consequently, the reverse repo rate under the LAF stands adjusted to 6.5 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 8.5 per cent with immediate effect.
Since the Reserve Bank's Third Quarter Review (TQR) of January 2013, global financial market conditions have improved, but global economic activity has weakened.
On the domestic front too, growth has decelerated significantly, even as inflation remains at a level which is not conducive for sustained economic growth.
"Although there has been notable softening of non-food manufactured products inflation, food inflation remains high, driving a wedge between wholesale price and consumer price inflation, and is exacerbating the challenge for monetary management in anchoring inflationary expectations," said the RBI.
RBI said India's GDP growth in Q3 of 2012-13, at 4.5 per cent, was the weakest in the last 15 quarters.