The Reserve Bank of India (RBI) may have trimmed its key policy rate by 25 basis points to 7.25% after reviewing monetary policy on Friday, but companies and individuals are unlikely to see their borrowings becoming cheaper in a hurry. RBI governor D Subbarao said on Friday that he expected monetary transmission to start only after three to four months but was confident the cumulative effect of all recent policy rate cuts, totalling 75 basis points, would be seen.
Although the central bank said risks to growth had risen, it didn?t think it necessary to cut the cash reserve ratio (CRR), a move that might have prompted banks to lower loan rates, albeit marginally. However, the central bank committed to ensuring adequate liquidity through open market operations. ?We believe that the liquidity deficit is frictional and not structural and, moreover, the wedge between deposit and loan growth has narrowed, so we didn?t see reason to cut the CRR,? Subbarao explained.
More than the absence of a CRR cut, what upset the equity and bond markets was the governor?s observation that there was ?little space for monetary easing? given the balance of risks stemming from the RBI?s assessment of the growth-inflation dynamic. ?Little is not ?a little?… Well, the alternative was to say nil. But we also did not say ?a little?,? Subbarao said when asked to quantify the little room for rate cuts.
The governor?s view that there could even be ?a reversal of the policy stance? if risks to the current account deficit (CAD) and its financing rose made the street nervous. The CAD, the governor said, may not be substantially lower in FY14 than the anticipated 5% of GDP in FY13. ?We can?t say how the CAD will behave and so we are alerting all stakeholders. What we are saying is that should we need to respond, we will not hesitate to do so,? Subbarao said.
The central bank?s GDP growth projection for FY14 is an anaemic 5.7% compared to the government?s estimates of 6.1-6.7%, while it expects inflation to rule in a range of 5-5.5%, hoping it will come off to 5% by March next year. ?Growth may have bottomed out but there hasn?t been any dramatic revival,? the governor observed. Not surprisingly, non-food credit, the central bank estimates, will grow at a subdued 15% this year and deposits at a weak 14%.
Given that deposits are becoming hard to come by, and that liquidity remains tight, bankers were unanimous it would be difficult to drop loan rates. ?Liquidity needs to ease significantly to within a percentage point of the NDTL (net demand and time liabilities), then you will see the market mechanism work,? said Aditya Puri, CEO and MD, HDFC Bank.
Chanda Kochhar, CEO and MD, ICICI Bank, acknowledged that rates on certificates of deposit had come down. ?However, the seasonal demand for currency at the end of the quarter could make money tight again and, moreover, deposit growth is not encouraging. If the cost of funds goes down, banks can either cut base rates or aggressively lower rates for some sectors,? Kochhar said.