Surprise 25-point reduction in key policy rate
The Reserve Bank of India (RBI) on Thursday sprang a surprise, trimming the repo rate by 25 basis points, signalling a turn in the rate cycle. However, not all banks were sure they would be cutting lending rates soon given how a lower yield could hurt margins at a time when cheaper credit was not expected to stimulate demand in the near future.
Nevertheless, with the RBI indicating there could be more monetary easing ahead, given inflation momentum had stayed low despite the reversal of favourable base effects — although the quality of fiscal consolidation would be a decisive factor — money is likely to become cheaper sooner rather than later.
While Union Bank and United Bank of India pruned their base rates by 25 basis points each on Thursday, State Bank of India (SBI) chairman Arundhati Bhattacharya sounded circumspect as she told a leading television channel it was difficult to say whether her bank would be going ahead with a cut in the base rate immediately. “We need to work our way through the numbers at the ALCO (asset-liability committee),” Bhattacharya said, pointing out that her bank was already offering the most competitive terms in the industry. Punjab National Bank, however, indicated it may cut loan rates after it discussed the matter at an ALCO meet next week.
India Inc, however, is looking for more and sooner. Sunil Munjal, joint managing director, Hero MotoCorp, said while the 25 basis points cut was welcome, it didn’t quite meet expectations. “With WPI at zero and oil below $50, I would imagine we should get a cut of 100 basis points in quick stages,” said Munjal, who added that the recovery in industry had been slow and patchy.
The stock markets, nevertheless, roared into rally mode — soaring 8XX points in intra-day trade — before settling at 28,075.55 points, up 728.73 or 2.66%, convinced that more rate cuts would follow, boosting investment and shrugging aside a very mediocre performance from corporate India in the near term. Foreign portfolio investors, who had slowed down their purchases of Indian stocks, are estimated to have bought close to $30 million of equities on Thursday, encouraged by the central bank’s move.
Bonds too rallied smartly with the benchmark yield closing at 7.69%, with economists pencilling in an additional cut of at least 75 basis points by March 2016. The view also boosted the rupee, which ended stronger at xxx to the dollar. “The improved RBI credibility, lower oil prices and hopes that the rate cut accelerates an economic revival will all help. The INR may outperform in the short run despite likely RBI reserves replenishment, “Rohini Malkani at Citigroup wrote.
With the repo rate having being dropped to 7.75%, the reverse repo rate under the liquidity adjustment facility stands adjusted to 6.75% and the marginal standing facility rate and the bank rate to 8.75%. The cash reserve ratio remains unchanged at 4%.