0.5% rate cut for sustainable growth: Rajan

Mumbai: RBI Governor Raghuram Rajan on Tuesday said the 0.50% reduction in key rate is to ensure strong and sustainable growth, and was driven primarily by its preconditions being met and the weakness in external environment.

"The conditions we had laid out have been broadly met except monsoon...We have also seen some dramatic reduction in external environment, including China has had a tremendous effect on commodity prices including on oil prices and its prospects," Rajan said after the monetary policy announcement.

RBI cut the lending rate by a surprising 0.50%, terming it as a "front-loaded" action but affirmed its commitment to the accommodative stance it adopted in January. Rajan also made it clear that the RBI has not been "excessively aggressive" with the rate call and it should not be misconstrued as a bonus ahead of the Diwali festivities.

"We have used what room we had, I don't think we were excessively aggressive. We weren't throwing Diwali bonus. Given the state of the economy, how can we move it forward," he said. After the clarity on meeting the January 2016 target of containing inflation under 6%, Rajan said the focus now needs to shift to squeezing it further to 5% by early 2017.

The Governor said help from the government is very crucial, and welcomed the support being given through keeping the minimum support prices of grains lower and initiating other supply side measures. On inflation, Rajan expressed concerns on pressures emanating on the services front, where we have seen prices of education and healthcare go up considerably.

He also said that it is difficult to gauge the supply in this sector, unlike other ones. "The capacity utilisation, the first factor which leads to more investment, is still very tepid and...Suggest there is room for more domestic demand which will be non-inflationary and it would create more investment. We need to restart investment. Corporate investment has been weak," he said.

Inflation projected down to 5.8% for '16

The Reserve Bank lowered its inflation projection to 5.8 per cent for January 2016 and said it will aim to bring it down further to 5 per cent by the end of next financial year. RBI had earlier projected inflation at 6 per cent by January. RBI said that "inflation is expected to reach 5.8 per cent in January 2016, a shade lower than the August projection".

Inflation has been trending lower for quite some time with the CPI based retail inflation falling to a record low of 3.66 per cent in August. The WPI based inflation remained in the negative zone at (-) 4.95 per cent on cheaper food items and overall fall in commodity prices. Rajan said inflation is likely to go up from September for a few months as favourable base effects would reverse.

To review interest rate on small saving schemes

In a signal to banks to cut lending rates, government on Tuesday said it will review the interest rate on small savings, like PPF and Post Office deposits, to bring them in line with market rates. With small saving deposits commanding an interest rate of 8.7 to 9.3 per cent, banks have been reluctant to transmit the entire policy rate cut by RBI to borrowers. They want to keep their deposit rates attractive to match with those in small saving schemes, popular among masses.

“It has also been decided that government will undertake review of small saving interest rate also,” Economic Affairs Secretary Shaktikanta Das said. Smalls saving schemes include Post Office Monthly Income Scheme (MIS), Public Provident Fund (PPF), Post Office Time Deposit Scheme, Senior Citizen’s Savings Scheme, Post Office Savings Account, and Sukanya Samriddhi Accounts.

Lowers GDP forecast for FY16 to 7.4%

The Reserve Bank revised downwards its real GDP forecast for 2015-16 to 7.4% from earlier expectation of 7.6%, saying that growth is expected to pick up in the latter part of the fiscal. "Overall, lead/coincident indicators, the forward looking surveys and estimates from model-based forecasts warrant a downward revision of Gross Value Added (GVA) growth to 7.4% in FY16 from the projection given in the April Monetary Policy Report (MPR)," RBI said in its monetary policy report.

It said growth in real GVA at basic prices is expected to be around 7% in the third quarter of 2015-16 before firming up to around 7.6% in the fourth quarter with risks evenly balanced around this projection. The report, however, said real GVA growth is expected to pick up gradually in 2016-17 on a shallow cyclical upturn, driven by an expected normal monsoon and some improvement in external demand, but assuming no structural changes induced by policy measures and the absence of major supply shocks.

"The current environment of soft global commodity prices provides a potential upside bias to the growth projections," the report said. It said headline CPI inflation is expected to firm up from its current trough and rise to around 4.5% in September as favourable base effects reverse and average 5.5% in the third quarter and 5.8% in the fourth quarter of FY16. "Assuming that various determinants of inflation evolve in the manner posited by staff in this MPR, especially the evolution of global crude oil and domestic food price dynamics, CPI inflation is expected to average 5.5% in FY17 and moderate to around 4.8% in Q4 of FY17," the report said.

RBI allows ‘Masala Bonds’

The Reserve Bank of India (RBI) on Tuesday allowed India Inc to issue rupee-denominated bonds overseas as another source of credit and shield it from currency swings, and also allowed foreign funds to invest in state securities with a cap. The rupee-denominated bonds, which are often called "Masala Bonds", were proposed in the first bi-monthly monetary policy for 2015-16. The bonds, with a minimum tenure of five years, call for their redemption in rupees.

According to the RBI, based on the comments received on the draft framework and in consultation with the government, it was decided to permit Indian corporates to issue rupee-denominated bonds with a minimum maturity of five years. The ceiling of such bonds -- a similar offering of which was made by the International Finance Corporation -- will come under the prescribed limits allowed for foreign investment in corporate debt, which is at present set at $51 billion.

Pro-growth move: India Inc

India Inc on Tuesday said the Reserve Bank's move to cut interest rate by 0.50 per cent is "pro-growth" and exhorted banks to transmit the lower interest rate to borrowers to revive demand and kick-start the investment cycle. CII Director General Chandrajit Banerjee said, "Industry is happy that the RBI has finally recognised the weakness in underlying economic activity and the need for a reduction in borrowing rates to drive a recovery.

"Today's action by the RBI has removed considerable uncertainty with regard to the direction of borrowing costs faced by industry. The corporate sector will now be in a better position to drive a recovery in investment and growth."

Yes Bank MD & CEO Rana Kapoor said that amidst easing inflation and lowered growth projection, the reduction in policy rate will help to reinforce the structural policy reforms of the government, allowing an investment-led job-creating revival in consumption demand. Assocham Secretary General D S Rawat termed the Reserve Bank's move to slash key rate a "pleasant surprise" and said Governor Rajan has delivered a Diwali bonus.

"What is even more heartening is the kind of resolve by Governor Dr Raghuram Rajan to work with the government and ensure that the banks pass through the rate cut without delay. "As much as 125 bps interest rate cut has been announced since January this year. The ball is certainly in the court of the banks, which must now rise to the occasion," said Rawat.

Associate Managing Director at Moody's Investors Service Atsi Sheth said the move to slash interest rate suggests that the RBI sees underlying growth trends as subdued enough to require more aggressive stimulus.

Realtors seek cheaper loans

Hailing the Reserve Bank's decision to cut interest rate by 0.50 per cent, real estate developers on Tuesday asked the banks to pass on the benefits to home loan borrowers that would help revive housing demand especially during upcoming festive season.

"It is a very welcoming announcement which RBI Governor has made, 50 basis points was long overdue. Not only realty but all manufacturing industry and all businesses in general are more than encouraged by this announcement," realtors' apex body CREDAI's National President Getamber Anand said.

"Our appeal to all banks is to pass on this rate cut to home buyers who avail home loans because that is what RBI governor has been saying that all the rate cuts that have happened have not translated into the reduction of home loan rates. This is now imperative and it must be done to benefit the end user," he added.

Commenting on the rate cut, India's largest realty firm DLF's CEO Rajeev Talwar said: "Very good announcement by RBI. Have left the job to the Finance Ministry to now convince the banks to lower their base rate."

Auto sector sees 15-20% growth

Welcoming rate cut by RBI, automobile manufacturers On Tuesday said it has come as a 'festival gift' that would help the struggling sector meet 15-20 per cent sales growth during the upcoming festive season.

"This is a festival gift. Traditionally, during the festive season, the auto industry witnesses sales growth of 15-20 per cent, which was missed in the last couple of years. This reduction in rate by the RBI has assured that the growth will be achieved," Hyundai Motor India Ltd (HMIL) Senior Vice President (Marketing and Sales) Rakesh Srivastava said.

He said the rate cut gives a positive signal towards enhancing optimism in the sector, where 65 per cent of car sales are financed. A reduction in interest rates will reduce cost of ownership and help the automakers get more customers.

Expressing similar views, Maruti Suzuki India Executive Director Marketing and Sales R S Kalsi said: "On the whole, it gives a good signal to customers. The market so far has been moving very slowly but with this (rate cut) sentiments will improve. It gives the much-needed boost to the market in the pre-festive season."