Govt, India Inc. welcome RBI rate cut

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SME Times News Bureau | 03 Jun, 2015
Major stakeholders of the Indian economy, especially the government, India Inc. and investment funds, welcomed the third policy rate cut announced by the Reserve Bank of India (RBI) on Tuesday.

The Chief Economic Adviser to the government, Arvind Subramanian said: "These cuts are consistent with the trends in the economy, including strongly declining inflation, contained current account deficit and ongoing strong fiscal discipline."

Subramanian was followed in welcoming the rate cut by Chanda Kochhar, managing director and chief executive of ICICI Bank, who said: "Uncertainties cited in the policy statement present a pragmatic evaluation of economic conditions warranting a guarded approach, particularly with regard to risks to inflation and impact of monsoon."

Industry lobby Confederation of Indian Industry (CII) said the move reinforces the perception that the government and the RBI are working to take the economy to a higher pedestal of growth.

"Many stalled projects, which are waiting for availability of credit at cost-effective rates, would find it viable to restart operations if the RBI continues with its rate easing cycle," said Chandrajit Banerjee, CII director general.

The Federation of Indian Chambers of Commerce and Industry (FICCI) cited that the apex bank has revised downwards growth projection for 2015-16 from 7.8 percent to 7.6 percent, thus calling for a more concerted effort to support growth.

"The need of the hour is to propel demand. With several projects being unclogged by government and public investment being stepped up, there is a case for crowding in private investment. However, the latter requires a simultaneous push in the form of lower lending rates," said Jyotsna Suri, FICCI president.

The Associated Chamber of Commerce and Industry of India (Assocham) said the cut in interest rate is too little and too late to infuse the consumer demand, which should then induce investment.

"It is time growth is given the focus. Otherwise, growing at the fastest rate in the world in terms of GDP ahead of China, would only remain a hype," said Rana Kapoor, president of Assocham.

According to Kapoor, at least 50 basis points cut in the repo rate was required along with a reduction in the cash reserve ratio (CRR) so that banks are able to reduce their cost of funds.

PHD Chamber of Commerce and Industry expressed the view that the repo rate must not be more than six percent to induce demand and refuel industry growth.

"The industry must be facilitated to grow in double digits to achieve the desired objectives of 'Make in India'," said Alok B. Shriram, president, PHD Chamber of Commerce and Industry.

Shriram added that there must be transmission by the banks of the front loaded repo rate cut by the RBI to the lending rates.

Debopam Chaudhuri, chief economist and vice president of research at ZyFin Research, said the RBI outlook appears cautionary, suggesting a pause in expansionary policy for sometime hereon.

"Today's cut of 25 basis points is not expected to make loans cheaper enough to entice demand. This may have a negative impact on an otherwise healing consumer confidence with Indian consumers being most confident compared to their counterparts in other major emerging economies," Chaudhuri said.

Mihir Vora, director and chief investment officer with Max Life Insurance, said that the RBI has taken the decision to address the growth imperative now and wait for further data on commodities and monsoon to decide on subsequent actions.

"It has also been highlighted that some PSU (public sector undertakings) banks will need capital if they are to support lending as investment revives," Vora said.

Kunal Shah, fund manager of debt at Kotak Mahindra Old Mutual Life Insurance, predicted that if the food inflation remains under control, then the RBI can ease further, bond yields in such case will drop below 7.5 percent.

"In near term, yields will remain in the narrow range with upward bias and take cues from monsoon performance and international energy prices," Shah said.

Dinesh Thakkar, chairman and managing director with Angel Broking, said that the food grain production for 2014-15 coupled with the non-availability of buffer stocks for pulses and oil seeds would result in inflationary pressures from August 2015.

"However, in our view, proactive government measures on food grains supply may result in inflation surprising positively, which would then provide room for more rate cuts post monsoon”" Thakkar said.

The RBI announced a 25 basis points cut in the repo-rate from 7.5 percent to 7.25 percent in its bi-monthly monetary policy review.