RBI may cut rates before next policy review: Rajan

SBI rules out rate cut in near future

Mumbai: Top public sector lender SBI ruled out any interest rate cut for its borrowers, even as the RBI chided banks for not having passed the full benefits of the last three reduction in its policy rate.

SBI Chairperson Arundhati Bhattacharya said any rate cut by the bank would depend on a lot many factors including credit growth and she does not see any room for any cut in the near future. This came soon after the Reserve Bank kept its policy rates unchanged. RBI has cut the rates thrice so far in 2015 by 25 basis points each.

Rajan, who has used strong words against banks for holding on to rates in the April and June, on Tuesday said banks have only cut 0.30 per cent at the median level as against the RBI s cut of 0.75 per cent this year.

Bhattacharya said that the bank had raised the rates by 30 basis points only when RBI had hiked the policy rate by 75 basis points, and the reduction in the bank's rate has also been 30 basis points when the central bank has cut the policy rate by 75 basis points.

Status quo disappoints India Inc

Disappointed with the RBI's move to hold policy rates, India Inc on Tuesday said the central bank should have slashed the benchmark rate to address risks to economic growth accruing from weak demand conditions which are holding back investments, as cost of capital remains high.

"CII is of the view that the policy of frontloading the interest rate cuts should have been allowed to continue," CII Director General Chandrajit Banerjee said. He added that credit demand is weak and corporates and banks are grappling with a large number of stressed assets, particularly in the infrastructure sector.

"A cut in interest rate in such a situation would have done much to restore the investment cycle," Banerjee noted. However, going forward, CII said it expects the spotlight to shift towards growth and the RBI to resume monetary easing in its next monetary policy when there would hopefully be much more clarity about the inflation trajectory, the normalcy of monsoons and the possible US Federal Reserve actions.

FICCI President Jyotsna Suri said, "The decision of the central bank to keep the policy rate unchanged is disappointing for the industry. Given that the industrial growth still remains volatile and demand conditions have not seen much improvement, there is a need to give policy stimuli to encourage demand and investments."

The Reserve Bank on Tuesday kept its policy rates unchanged, with Governor Raghuram Rajan saying that the headline inflation is at elevated levels and banks are yet to pass on the full benefits of previous rate cuts. RBI has cut the rates thrice so far in 2015 by 25 basis points each in January, March (both off-policy moves), and during the June policy.

"India Inc is surely disappointed with the RBI not announcing any cut in the policy interest rates, which have become one of the biggest drags on the balance sheets of the corporate," Assocham Secretary General DS Rawat said.

Exhorting the RBI to take full advantage of the cheap commodity prices, including the fuel and go in for some "bold moves" in interest rates, Rawat said that would have helped revive the consumer demand and in de-leveraging the balance sheets.

Engineering exporters' body EEPC India said the high cost of borrowing, coupled with increasing number of loans turning into NPAs, have pushed manufacturer exporters in a "vicious circle".

"It is time the government intervened to announce some important measures to mitigate exporters' pain, else exports would fall far short of even $300 billion in the current fiscal, against $310 billion in 2014-15," EEPC India Chairman Anupam Shah said.

Leaves realtors desolate

The real estate industry on Tuesday expressed disappointment over the Reserve Bank of India's (RBI) decision to keep the key interest rates unchanged, saying rate cuts were required to boost manufacturing and property sectors. CREDAI, the apex body of real estate developers, said the industry is struggling due to low demand, rise in input cost and high interest rates.

It hoped that the RBI would cut key interest rates in the near future to help increase housing demand. "Very disappointing. We were hoping that there would be some relief. Rate cuts were required to spur investment in manufacturing and real estate sectors," CREDAI President Getamber Anand said when asked about his views on the RBI's policy.

CREDAI-NCR President Manoj Gaur said the policy was on the expected line. "We hope that RBI will now look for a consistent decrease in repo rate in the near future. This will have a positive impact on the growth of the realty sector," he said in a statement.

Realtors' body NAREDCO Chairman Navin Raheja felt that the current depressed sentiments in the real estate market would continue till any reduction in interest rate happens.

Property consultant Cushman & Wakefield's South Asia Executive Managing Director Sanjay Dutt said, "Although the Central Bank has cut interest rates by 75 basis points so far this year, banks have passed on only a part of the benefits to consumers not bringing much cheer to the realty sector."

Parsvnath Developers Chairman Pradeep Jain said in order to revive sentiments of the real estate sector and to prop up growth in the economy, the RBI should slash rates in its monetary policy going forward as the consumer price inflation eases.

Rajan favours ‘no veto power’ on deciding rates

Signaling truce with the government over who should decide interest rates, RBI Governor Raghuram Rajan favoured doing away with the veto power of the central bank chief, arguing it would be better for a committee to decide the key rate rather than one individual.

He further said that while the details of the monetary policy committee (MPC) will have to be ironed out, "there are no differences between RBI and the government" on this matter. "Currently, the situation is governor has a veto, that is, effectively all advice is only advice and ultimately decision is Governor's. So, if we continue to retain a veto, it doesn't change the current situation. It maintains the status quo. That is something to keep in mind," Rajan said here.

Govt hopes RBI will cut rates next month

With inflation under control, the government hopes that RBI, which has maintained status quo in Tuesday's monetary policy review, will cut interest rate next month to boost much-needed investments and growth. The Reserve Bank, said the Finance Ministry sources, will take into account the impact of monsoon, likely crop yield and policy action by US Federal Reserve, and in all likelihood announce a cut in the key interest rate.

According to the ministry officials, RBI will have to take preemptive steps next month to counter flight of capital following any likely increase in interest rates by US Federal Reserve. "There could be a rate cut by RBI in September as the instance of Federal Reserve would clear by that time. By that time, the outcome of the monsoon and its effect on crops will also be known," said one official.

Household expect inflation to touch 10.1% in 3 mths

Inflation expectations by Indian households rose for a third consecutive quarter, a survey conducted by the RBI showed on Tuesday. Households expect inflation to touch 10.1 percent within three months, according to the RBI survey conducted in June, higher than 9 percent in the previous survey in March.

The one-year inflation expectation by households was at 10.3 percent, compared with 9.1 percent in the previous survey. India last experienced double-digit inflation in November 2013.

The survey came on the same day the RBI kept interest rates on hold, as it continues to track inflation among other factors, including "a sustained hardening" of inflation outside of food and fuel that it described as "most worrisome". These expectations are rising even as India's consumer price inflation dropped to 5.4 percent in June.

RBI Governor Raghuram Rajan on Tuesday hinted that the central bank may cut interest rates before the next policy announcement on September 29, depending upon macroeconomic indicators.

"We are waiting information. There was more need to move fast in the early stages of the turnaround. We will take all information into account and decide whether at times it warrants moving in between policy cycle or it does not," he said after the monetary policy review here.

Both CPI and WPI inflation numbers for July would be released this month while Index of Industrial Production (IIP) figures for June as well as first quarter GDP numbers are also expected in the same month. Besides, RBI will get another set of WPI, CPI inflation data for August and IIP numbers for July in September to firm up its view on interest rates before the fourth bi-monthly monetary policy review on September 29.

So far in 2015, RBI has cut benchmark rate twice out of policy review. It did it first in January when repo (short term lending) rate was slashed by 0.25 per cent, followed by a similar percentage point in March. "It's more reasonable to go back to pattern during some time. But nobody ever rules out any action that central bank can take. It's one of the options that we always have," he said.

Meanwhile, RBI today kept the repo rate unchanged at 7.25 per cent and the cash reserve ratio at 4 per cent. "It is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy," RBI's third bi-monthly monetary policy statement said.

"As the RBI awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation," it said. The outlook for growth is improving gradually, it said, adding that favourable real income effects could accrue from weaker commodity prices, in particular crude oil, and a possible step-up in agricultural activity if monsoon conditions continue to improve.