Mumbai: The Reserve Bank of India (RBI) on Tuesday cut its forecast for economic growth in the new fiscal year to 6% and urged banks to reduce the rates at which they lend money to companies, consumers and homeowners.
The central bank cut two key policy rates through which it controls short-term interest rates. The repo rate, which it charges banks to borrow overnight money, and the reverse repo rate, which it pays to borrow overnight money from banks, have both been brought down by 25 basis points. A basis point is one-hundredth of a percentage point.
Government and corporate bond yields eased even as the rupee dropped to a two-week low.
Economists were divided in the run-up to the annual monetary policy for 2009-10, with half rooting for a reduction in interest rates and the others advising RBI not to change rates, even as inflation hovers close to zero and economic activity continues to be sluggish.
The central bank has now reduced the repo rate by 425 basis points and the reverse repo rate by 275 basis points since mid-September, when a sudden outflow of foreign money created a credit drought in the local money market and later contributed to a severe economic slowdown.
Also See How RBI Sees 2009-10 (Graphic)
The portion of deposits that banks have to keep with RBI has also been cut by 400 basis points in recent months to pump money into the financial system.
RBI has since been worried that bank lending rates have not fallen in tandem with policy rates. “Probably this is RBI’s way of nudging the markets to a softer rate region and direct banks to lower their lending rates further,” said Indranil Pan, chief economist of Kotak Mahindra Bank.
Also See Rate Cut (Graphic)
Between October 2008 and 18 April 2009, public sector banks have reduced term deposit rates by 125-250 basis points, private sector banks by 75-200 basis points and the five major foreign banks by 100-200 basis points. The reduction in the range of benchmark prime lending rates was 125-225 basis points by public sector banks, followed by 100-125 basis points by private sector banks and 100 basis points by five major foreign banks.
“There is scope for banks to reduce lending rates further and ensure flow of credit to productive sectors,” RBI governor D. Subbarao said in the post-policy press meet.
Bankers have been quick to respond. ICICI Bank Ltd took the lead by cutting its lending and deposit rates.
Others such as Union Bank of India (UBI), Uco Bank, Punjab National Bank and Bank of Baroda will decide in the coming days.
“Over a period of one year, public sector bank benchmark prime lending rate is expected to come down by 75 to 100 basis point unless any unforeseen events unfold,” said UBI chairman and managing director M.V. Nair.
Neeraj Swaroop, regional chief executive (India and South Asia) at Standard Chartered Bank, said: “We have been slashing rates in the past six months. We will review our prime lending rate in light of the current review.”
Keki Mistry, vice-chairman and managing director of mortgage financier Housing Development Finance Corp. Ltd, said: “We have not been impacted by the rate cuts, however, whenever our cost of funds ease we will pass on the benefit to our customers.”
“The rate cut was unexpected as this has opened a window for possible tightening of policy rates in the latter part of the year on account of heightened inflationary expectation,” said Ajit Ranade, chief economist, Aditya Birla Group.
“Possible fiscal expansion, pick up in economic activity and monetary expansion coupled with global liquidity could spike inflationary expectations towards year-end,” he added. “Banks’ unwillingness to lend to the corporate sector is worrisome. Banks are not lending to small companies and pumping in liquidity will not solve the problem.”
Bank credit growth has dipped to 17% for the year ended 27 March, against 22.3% in the same period last year.
Graphics by Sandeep Bhatnagar and Ahmed Raza Khan / Mint