RBI Cuts Rates Again, But Does It Matter?

Tuesday, June 02, 2015
The RBI has cut its lending rate by a total of 75 basis points in three instalments (file photo: Reuters)

As widely expected, the Reserve Bank of India (RBI) cut interest rates for a third time this year on Tuesday, taking advantage of subdued inflation to support growth in the economy. But the Associated Chamber of Commerce and Industry of India (ASSOCHAM) said the quarter point reduction in the repo rate to 7.25 percent was too little and too late to boost consumer demand.

"We still have very weak investment. We haven't seen a strong pick-up," RBI Governor Raghuram Rajan admitted to the media.

He urged banks to pass on the rate cuts into lower lending rates. Despite two earlier repo rate cuts by RBI, very few banks have passed on the benefits to customers.

Eight of the more than two-dozen state-run lenders, who dominate India's banking sector with more than 70 percent share of the assets, have yet to announce any interest cut this year.

Bankers have blamed tight liquidity and slower credit growth as reasons for not cutting rates. India's bank loan growth for the fiscal year to end-March was the slowest in 18 years.

"There is not overmuch of liquidity. More of liquidity would also enable better transmission of rate cuts," SBI chairperson Arundhati Bhattacharya said in a television interview following the RBI rate decision.

While the central bank has cut its lending rates by a total of 75 basis points (0.75 percentage point) in three instalments, SBI has only lowered its lending rates by 30 basis points (0.30 percentage point) in two tranches.

"Banks should now pass on the benefit to boost demand. Interest rate on home loans should be 9-9.5%," real estate major DLF's director Rajeev Talwar said.

Realtors' apex body CREDAI president Getamber Anand agreed that the RBI's decision was a good step but the “market was expecting bigger reduction. Banks should pass on the benefits immediately as per RBI direction," he added.

Property consultant JLL India chairman and country head Anuj Puri said the downward revision in RBI's repo rate would positively impact sentiment in the real estate market.

"Banks will now be able to offer loans at more attractive rates. Cheaper loans for home buyers will prompt a renewed interest in residential property purchase from end users and investors," Puri said, adding that cost of funding for real estate developers should also reduce marginally.

The RBI has left open the possibility of further cuts later this year, but with forecasts of a below-average monsoon that could put pressure on food prices, that looks increasingly unlikely.

- Karan Singh

To Learn More:

RBI cuts rates for third time to put Indian growth on firmer footing (by Rafael Nam and Suvashree Choudhury, Reuters)

Rajan's message to Jaitley: RBI alone can't revive growth, no more rate cuts for now (by Dinesh Unnikrishnan, Firstpost)

25 bps cut in interest rate too little too late: ASSOCHAM (by India Infoline)

RBI effect: SBI, three others slash rate; realty firms say repo cut may spur housing demand (Hindustan Times)


Leave a comment