Hawkish RBI cuts interest rate by 25 bps

Move may make auto, housing and other loans cheaper.

Mumbai (Agencies): It is his firth and the last annual monetary policy, for RBI governor � Duvvuri Subbarao, who showed his strong will by sticking to cautious stance, the apex bank has cut policy or repo rate by 25 basis points, of course on the expected lines. Although the decision disappointed the industry and markets, the move will benefit the common man who seeks bank loans for automobiles, housing etc, at the banks will have to reduce the primary lending rate.

Subbarao also kept the liquidity enhancing cash reserve requirement unchanged, while ringing warning bells like bad external economic conditions and possibility of revival of inflationary pressures.

Repo rate, the rate at which the RBI lends to banks, is cut to 7.25 per cent from 7.5 per cent earlier. The Cash Reserve Ratio, the proportion of deposits to be kept with RBI is left unchanged at 4 per cent, which improve the liquidity deficit. The banks are not drawing around Rs 84,000 crore from overnight window as against Rs 1.8 lakh crore last fiscal.

While justifying the limited easing, Subbarao said, "Monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping public investment".

The upside risks to inflation, which cooled to a three- year low in March, "still remain significant" in the near term on suppressed inflation on the energy front, Subbarao added. "Overall, the balance of risks stemming from the Reserve Bank's assessment of the growth-inflation dynamic yields little space for further policy easing," he said. RBI expects inflation to hover broadly around the 5.5 per cent mark in the current fiscal and said it will deploy "all instruments at command" to bring it down to 5 per cent by March next year.

RBI in its annual monetary policy statement said there would be modest improvement in the country's economic growth to 5.7 per cent in the current fiscal, as against the decade's low of 5 per cent in 2012-13. Even though factors like lower commodity prices and narrowing fiscal deficit would help stem inflation, RBI said the "upside risks to inflation still significant in the short term" in view of supply imbalances, correction in administrative prices of fuel and rising minimum support price for crops.

Given these factors, "monetary policy cannot afford to lower its guard against the possibility of resurgence in inflation pressures," Subbarao said.A Describing the widening current account deficit and its financing as the biggest threat to monetary policy, RBI warned that growth would slip if governance is not improved and supply constraints are not unlocked.

The central bank expects non-food credit growth to pick up marginally to 15 per cent in 2013-14 from 14 per cent achieved in the previous fiscal and deposit mobilisation to be flat at 14 per cent. There were a slew of measures on the regulation of banks and non-bank entities.

RBI said its probe into the Cobrapost sting allegation have revealed the need for better adherence to regulatory compliance by banks as some aberrations have been found. It also said that banks are not carrying out customer due diligence as per requirements while marketing and distributing third-party products and said guidelines with remedial action regarding the same will come later.

Referring to customer services, it asked banks to stop differential treatment to home-branch and non-home branch customers, apart from asking banks to price retail loans at uniform rates.A With the falling gold prices making lenders uncomfortable, it also asked banks not to lend against gold coins above 50 grams.

Credit limit for MSMEs hiked to RsA 5 crore Mumbai (PTI): RBI on Friday announced three changes to the priority sector lending (PSL) norms and more than doubled the limit for the Micro Small and Medium Enterprises (MSME) advances to the services sector to Rs 5 crore per borrower from Rs 2 crore earlier. Similarly, the banking regulator also suggested an increase in loan limit to Rs 5 crore from Rs 1 crore in case of dealers/sellers of fertilisers, pesticides, seeds, cattle and poultry feeds, agricultural implements and other inputs which are classified as indirect finance to the agriculture sector. The reclassifications of the PSL regime have been done based on the feedback received from stakeholders regarding enhancement in certain loan limits to be classified as PSL advances "within the broad contours of the priority sector architecture," the apex bank said. Detailed guidelines for the same will be issued shortly. Even the limit on pledged loans to increase to Rs 50 lakh from Rs 25 lakh towards direct agriculture lending to individual farmers, corporate, firm and institutions engaged in agriculture and allied activities.

Expert bytes The decision of RBI to cut the policy rates by 25 basis points, the third time during the current year, in its annual policy review, sends a strong signal that the RBI is refocusing its priority in favour of growth in view of the moderating WPI based inflation and weakening demand in the economy. - S Gopalakrishnan, CII

We feel that the 75 basis points decline in the repo rate so far this year will be instrumental in reviving the confidence of the industry. - Naina Lal Kidwai, FICCI The EMIs for personal loans are not going to change; the interest costs for the industry is going to stay heavy and the investment trigger would stay absent. -Rajkumar Dhoot, Assocham The measures will spur the demand and boost the industrial output. For the easing of the tight market liquidity conditions on the backdrop of lower inflation, gold and crude prices, there was room to maneuver. - A Sakthivel, AEPC