The rate cuts show the Reserve Bank of India (RBI) is ready to promote growth, in addition to anchoring inflationary expectations, said Adi Godrej, president of the Confederation of Indian Industry (CII) and chairman of the Godrej Group.
In terms of quantum, the industry would have appreciated a higher repo rate cut, but under present circumstances, a 25 basis points lowering of repo rate does send the correct signal, Godrej said.
On Tuesday, RBI cut the repo rate the rate at which RBI lends to banks by 25 basis points to 7.75%, for first time in nine months. It also unexpectedly reduced CRR or the share of deposits banks must keep with the central bank, by 25 bps to 4%, which will infuse an additional R18,000 crore into the banking system.
A combination of high inflation, fuel price hikes, and the high cost of loans had slowed down automotive demand in India, hitting auto firms hard, with the Society of Indian Automobile Manufacturers (Siam) cutting sales growth forecast four times during the current financial year. Car sales alone are expected to grow a mere 0-1% in January, compared with 10-12% in April.
It is heartening to note RBI has cut 25 basis points both in CRR and repo rate. It was much needed, given that the GDP growth is moderating and industrial production is decelerating month after month, said Seshagiri Rao, JMD & Group CFO of JSW Steel. RBI rate cut is an encouraging move at a time when high interest rates were having negative impact on the country's economic growth.
On the eve of monetary policy review, RBI expressed concern over the growth slowdown, and further revised its GDP growth forecast for the fiscal 2013 down to 5.5% from 5.8%. Industry captains also demanded more liquidity be pumped in to spur investment. There is a tight liquidity condition in the money market as reflected by borrowings under repo window over R1 lakh crore.says JSW Steel's Rao.
We also want the government to push reforms as this would improve business sentiment, spur investments in the economy and create more monetary space for further easing.
CIIs Godrej echoed his words. The government has been actively pursuing a fiscal consolidation agenda and, therefore, it is fair to expect in the Union Budget, to be presented on February 28, the finance minister would outline a clear roadmap and measures which would bring down fiscal deficit within reasonable levels. A very high level of government borrowing to bridge the fiscal deficit would nullify any reduction in headline interest rates as real effective rates would continue to be high, he added.
Meanwhile, developers apex body Credai has called for a thrust on the realty sector. Though RBI has made a good beginning, the repo rate cut is just not enough. What we need is creation of a robust supply to curb inflation for which RBI needs to continue to ease fund supply position, Credai national president Lalit Kumar Jain said.