India Inc welcomes rate cuts, but wants more

April 21st, 2009 - 7:02 pm ICT by IANS  

KPMG New Delhi, April 21 (IANS) India Inc has welcomed cuts in key rates by 25 basis points by the Reserve Bank of India Tuesday, but added it expected bigger cuts.
Said Harsh Pati Singhania, president of the industry lobby Federation of Indian Chamber of Commerce and Industry (FICCI): “The cut in the repo rate could have been steeper because of the strong cushion provided by the extremely comfortable position with regard to inflation.”

Singhania said FICCI has also hoped a cap by the RBI on the reverse repo rate to encourage banks to keep sufficient funds with themselves for keeping the credit disbursal pipeline running.

Repo rate is the interest the RBI charges when it lends to banks, while reverse repo is the rate charged by the banks to lend to the apex bank.

Referring to cash reserve ratio (CRR), he said: “The RBI has kept the CRR unchanged at 5 percent. In the interest of keeping the credit flow going, the FICCI feels the CRR could have been pruned further by 100 basis points.”

Sajjan Jindal, president of the Associated Chamber of Commerce and Industry (Assocham), said the industry was expecting 50 basis points cut in repo rate and reverse repo rate.

Moody’s Economy.com expects the apex bank to maintain a loosening bias in coming months. Given its independence, further monetary easing should not be hindered by a weak fiscal position and still-high consumer price inflation, it said.

India’s weak fiscal position might have kept the RBI from cutting rates more as it is preserving its ammunition to use if things get worse. “In addition to rate cuts, the central bank may continue to use quantitative easing, which directly injects liquidity into the system.”

Added Abizer Diwanji, financial services head at global auditor KPMG: “Whilst the rate cuts are at best a signal from the RBI on its intent to see lower rates in the system, the RBI has stressed on developing a corporate bond market as well as rationalises the government borrowing program to keep interest rates lower.”

As per investment bank Goldman Sachs, the rate cutting cycle is nearing an end. Excess liquidity in the system, easing financial conditions and decline in corporate bonds suggest growth will recover by the second half this fiscal.

“This move by RBI may provide temporary relief, but long bond yields will push higher given the large government borrowing requirement. Goldman Sachs expects the RBI to cut the CRR of banks by 150 basis points.”

–Indo-Asia News Service

ash/ank/vt

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