After a gap of three years, cut the Reserve Bank Governor D Subbarao Tuesday short-term lending rate by 0.50 percent to 8 percent, a move that will reduce costs in the home, auto and corporate loans.
The reduction in the repo rate at which RBI offers to banks, has been led by growth slowdown and softening of inflation.
The cut is aimed at encouraging growth to 9 per cent levels seen before the global financial crisis that began in 2008, Subbarao said while revealing the annual credit policy here.
"The reduction in the repo rate is based on an assessment of growth have slowed during his post-crisis trend rate, which in turn is contributing to the slowdown in core inflation," the governor said.
RBI is linked to GDP growth for 2012-13 of 7.3 per cent. It is expected to be 6.9 percent in 2011-12.
After two consecutive cut since January, the Governor, but kept the cash reserve ratio of 4.75 per cent.
Subbarao, may be excluded further reduction in the funds rate in the near future, citing persistent upside risks to inflation and possible fiscal changes driven by higher oil subsidies. It expects that inflation will be around 6.5 per cent in March 2013.
"It must be emphasized that the deviation of growth from trend is modest. While upside risks to inflation persist. These considerations inherently limits the scope for further reduction in official interest rates," he said.
The decision will probably get the banks to cut lending rates for home, auto and corporate loans, experts say.
RBI has raised lending rates 13 times between March 2010 and October 2011 to curb inflation, which had lain near double digit.
This had led to protests from industry to cut rates and stimulate industrial and economic growth has slowed significantly in recent quarters.
In order to ease tight liquidity situation, Subbarao announced a doubling of borrowing under the marginal standing facility for banks to 2 percent of their deposits with immediate effect. It has also allowed banks to borrow under the MSF, even if they have excess government securities holdings.
On the growth front expect RBI FY'13 to be moderately better than the tax passed. It has bound GDP growth of 7.3 percent, which is 0.3 percent lower than the government projection for 2012-13. Growth in 2011-12 is seen at a 3-year low of 6.9 per cent.
Although spur growth has taken priority at Mint Road, RBI remains concerned about inflation scenario, call it as "challenging" because of the sharp spikes in crude oil prices and food articles in recent months.
Notes the moderation in manufacturing inflation, the governor pegged the total annual inflation target of 6.5 percent for FY'13 (which is 0.5 percent lower than the projections for FY'12), says the price increase will range-bound through the years.
Inflation was the main driving force that led the Reserve Bank to tighten the money supply, and later hold courses over the past 36 months.
During the same period, the inflicting 13 simultaneous walks, with 3.75 per cent repo rates over the 19-month period, making it one of the most aggressive central banks in the world.
Aside from harming investment activity, the rate hikes badly hurt retail borrowers in the form of higher repayments on loans put household budgets for a throw.
RBI made a conscious effort to placate that class by repeating that banks may not charge prepayment penalties from the home loan borrowers. It also announced to set up a working group to assess the possibility of having long-term fixed income products, which will not be exposed to interest rate changes.
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Tuesday, April 17, 2012
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