RBI leaves key policy rate unchanged

The Reserve Bank of India left the policy rates unchanged in its mid-quarter review as expected and has indicated a change in stance in its third quarter review scheduled in January, 2013.

The cash reserve ratio (CRR) of scheduled banks remains unchanged at 4.25 per cent of their net demand and time liabilities. The apex bank also left the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent. Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) and the Bank Rate at 9.0 per cent.

“In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards,” the central bank said in its policy review.

Headline inflation has been below the Reserve Bank’s projected levels over the past two months. The decline in core inflation has also been comforting to RBI. Furthermore, the easing of crude is expected to impart some softening bias to the evolving inflationary conditions if it is not offset by the impact of rupee depreciation.

Bankers said that they would be passing on the benefits only in the event of a Repo rate cut. State Bank of India has cut the base rate, or minimum lending rate, by 25 bps from 10 per cent to 9.75 per cent, when the CRR was cut October, 30, 2012. However, owing to tight liquidity situation and high cost of funds, bankers are hoping the January, 2013 policy would help kick-start growth.

Pratip Chaudhuri, CMD, State Bank of India, “There is no change in RBI's stance so I would think there would be no change in our deposit or lending rates. All banks have their assets and liabilities committees, so it is not right for an individual to decide on that front. When the policy rate changes, upwards or downwards, the ALCO being a larger group, takes in to account all the ramifications and implications and makes a pricing model."

"The movement in lending rates happens with the movement in cost of funds. It is too early to say what action will happen in January," said Chanda Kochhar MD&CEO of ICICI Bank. She said in the next quarter interest rates should be on the downward trend.

Aditya Puri, MD & CEO of HDFC Bank said money supply has not grown in line with what the RBI had said earlier. “So if there is substantial liquidity, which would mean LAF at around Rs 30,000 crore, then the cost of funds could change and there is a very clear mechanism to reduce the base rates," Puri said.

The liquidity conditions have remained tight in Q3 due to large government balances with the Reserve Bank and the widening wedge between deposit and credit growth. With a view to containing the liquidity deficit at reasonable levels, the Reserve Bank conducted open market operations (OMOs) on December 4 and 11, injecting primary liquidity of Rs 23,200 crore.

Rana Kapoor, Founder, MD & CEO, YES Bank, said, “I expect the RBI to ease repo rate by 50 bps between January & March 2013 and by an additional 50-75 bps through FY14 which will strongly support growth recovery’’.

Rating agency CRISIL said the continued revisions in administered fuel prices will keep WPI inflation in 2013-14 above the RBI’s comfort level of 4-5 per cent. The RBI is likely to lower rates in January in anticipation of lower core inflation going forward, it said.

Aggregate bank credit growth moderated to 16.8 per cent y-o-y as on November 16, from 19.4 per cent on March 30 on account of deceleration in growth across industry segments, such as textiles, metals, infrastructure and commercial real estate.

CRISIL expects the aggregate bank credit to grow by 15-16 per cent in 2012-13 on account of higher demand for retail loans as number of banks have cut interest rates on these loan products, slight pick-up in investment activity in the second half of the year and refinancing of foreign currency loans with domestic debt.

Ajay Srinivasan, Chief Executive, Financial Services, Aditya Birla Group, said 2012 was expected to be a year of growth recovery and inflation moderation. “Unfortunately, neither has panned out, making the job of RBI a really tough one this year. As we look forward to 2013, one could expect RBI to focus much more on reviving growth. Now, the focus is back on the government to resolve the policy constraints that are restricting our growth,’’ Srinivasan said.

However, most financial institutions remained optimistic of a change in stance

Vimal Bhandari CEO, Indostar Capital Finance, “With interest rate reduction imminent, it is hoped that corporates would start taking investment decisions for capital expenditure, the impact of which will be visible in the mid-term given the lead time."

(Edited by Prem Udayabhanu)

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