1. RBI repo rate cut will cheer consumers on likely fall in borrowing costs

RBI repo rate cut will cheer consumers on likely fall in borrowing costs

The RBI maintained its GVA growth projection for the ongoing fiscal at 7.6 per cent, with evenly balanced risks. Growth of GVA at basic prices is expected to improve to 7.7 per cent in 2016-17 from 7.2 per cent in 2015-16, similar to the Central Bank’s baseline projection.

Updated: October 6, 2016 12:34 PM
RBI-PTI-L Reduction of repo rate by the RBI has infused life in the manufacturing sector (PTI Image)

The Reserve Bank of India (RBI), under the aegis of a new Governor and a newly constituted Monetary Policy Committee, cut the repo rate by 25 basis points to 6.25 per cent with immediate effect. Contrary to our expectations of a deferring of the rate cut to the December 2016 policy review, the Central Bank displayed a more accommodative stance at the onset of the busy credit season, after being cautious on inflationary pressures in the recent past.

The RBI maintained its GVA growth projection for the ongoing fiscal at 7.6 per cent, with evenly balanced risks. Growth of GVA at basic prices is expected to improve to 7.7 per cent in 2016-17 from 7.2 per cent in 2015-16, similar to the Central Bank’s baseline projection.

The rate cut will cheer consumers on expectations of reduction on borrowing costs. However, the subdued profitability of the PSU banks, which had restricted transmission of past monetary easing, remains an area of concern. Nevertheless, the comfortable systemic liquidity, recent reduction in various small savings rates and the increasing wedge between the MCLR and money market rates, does provide some room for banks to lower their lending rates.

Bond yields have softened over the past few weeks on the back of sound liquidity and are already at multi-year lows. With a possible re-emergence of the seasonal tightness in systemic liquidity amidst the outflows with respect to the FCNR(B) deposits, we expect additional open market purchases of Government securities of Rs 50,000-60,000 crore in Q3 FY2017, as the Central Bank remains committed to maintaining a neutral structural liquidity deficit. Accordingly, further softening from current levels is likely to be limited till there is greater clarity on the timing and quantum of future rate cuts by the RBI, given the uncertainties in the global markets.

While the RBI continues to reiterate focus on further strengthening the domestic financial system, introduction of new products and regulations to deepen the financial markets, we eagerly await the Central Bank guidelines on large exposure framework for banks, which are due later this month, with keen interest.

(The author is Karthik Srinivasan, senior VP, co-head financial sector ratings, ICRA)

Tags: Repo Rate
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