In an unexpected move, the Reserve Bank of India (RBI) has lowered its key policy rate by 25 basis points to 7.5 percent on March 4. This move has come within days of the annual budget and is expected to encourage banks to drop interest rates on home and car loans.
Market experts and financial analysts had expected the RBI to cut rates again after its surprise January easing, but not many had expected a move as early as this month, just days after the Indian government presented its 2015 budget. The reduction will come into effect immediately.
“Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation,” RBI Governor Raghuram Rajan said.
The RBI’s rate cut is seen to be motivated by the government’s plans to meet fiscal deficit target of 3 percent by 2017-18.
“The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative,” he added.
Radhika Rao, economist at DBS in Singapore, hailed the decision by saying, “The Reserve Bank of India is expressing its confidence on inflation outlook. This also means that despite a higher fiscal deficit, the quality of fiscal consolidation has satisfied central bank’s expectations.”
Indian rupee has seen a surge after the cut.
“The picture it presents of a robust economy, with growth having picked up significantly over the last three years, is at odds with still-low direct measures of growth of production, credit, imports and capacity utilisation as well as with anecdotal evidence on the state of the economic cycle,” Mr Rajan said in the statement.
Here are some reactions to the much-discussed RBI rate cut:
FICCI President Jyotsna Suri: “This measure will help in improving the investor sentiment. FICCI hopes that this will be the beginning of further cuts in the policy rate by the Central Bank, and will enable its transmission into lower lending rates by the Banks.”
Shanti Ekambaram, President, Consumer Banking, Kotak Mahindra Bank: “This has been long awaited by all constituents of markets and industry. The recent sharp fall in crude prices, the significant drop in CPI & WPI, emerging global deflationary worries were factors that have perhaps prompted the rate cut. From here on the next major focus is likely to be the budget and the fiscal scorecard it presents and well as [predicts for the next year.”
Debopam Chaudhuri, VP- Research & Chief Economist, ZyFin Research: “Although this is a positive news for markets, there still remains some questions around this minute cut on its transmission mechanism to the end borrowers. Also, the economic recovery has been shallow with no significant effects felt on the streets, suggesting banks may still be cautious.”
Chanda Kochhar, MD & CEO, ICICI Bank: “The rate cut by RBI was widely anticipated and is a welcome move. Together with the various initiatives being taken by the government, the rate cut would strengthen the positive momentum in the economy by lowering borrowing costs as the lower rate regime reflects in bank funding costs over time.”
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