idFrom the New York Times (World) today (April 17, 2012)
April 17, 2012, 5:00 AM
What They Said: India’s Interest Rate Cut
By THE NEW YORK TIMES
Danish Siddiqui/Reuters
The Reserve Bank of India has cut the “repo rate,” or the rate that it
lends money to commercial banks, by 50 basis points to 8 percent, the
first rate cut in three years. The Reserve Bank left the “reserve repo
rate” and “cash reserve ratio,” or amount of cash banks must keep on
hand, unchanged at 7 percent and 4.75 percent, respectively.
A lowered repo rate may signal a decrease in interest rates for
consumer loans, and is generally considered a sign that Reserve Bank
officials believe the economy needs bolstering. Officials had hiked
rates numerous times recently in an attempt to curb inflation.
The Sensex gained 222 points in late morning trading after the Reserve
Bank’s announcement. This gain was moderated by the afternoon and the
Sensex was up 92 points as of 1:40 p.m. Coal India, Oil and Natural Gas
Company and real estate giant DLF showed the biggest gains, while
automotive companies like Tata Motors and Mahindra & Mahindra as well
as Reliance Industries had the biggest losses.
Here’s what the experts thought:
Abhijit Sen, member, Planning Commission of India : What the RBI is
essentially saying is that growth is below the trend and they think it
is necessary to have some stimulus to bring India back on the growth
path.
They also want to say that there are structural problems in terms of
investment, balance of payment and inflation.
Infrastructure plans did not take off and there is still high inflation
especially in the protein-based items. There are problems with current
account as well as the fiscal side related to the oil issue. These are
some important reasons why we are not being able to grow at a higher
rate. There is also a need for fiscal correction and reduction of
subsidies if we hope to achieve higher growth. It is a cut in interest
rate mixed with a strong message saying that the government must also
do all this to ensure growth.
R.V. Kanoria, President, Federation of Indian Chambers of Commerce and
Industry (FICCI): The RBI Governor’s recognition of the need to bring
growth back on track by cutting the repo rate by 50 basis points is a
welcome move. FICCI hopes that the Government would take cognizance of
the need to rein in fiscal deficit and contain expenditure on subsidies
by taking corrective measures particularly in the pricing of petroleum
products. This is necessary to avoid any negative implication on
inflation.
C. Rangarajan, Chairman, Economic Advisory Council to the Prime
Minister: The RBI has taken a good decision. It is being pulled by two
sets of opposing factors — slowing growth and increasing inflation. But
the redeeming factor is that non-food manufacturing inflation has
dropped significantly, which helped RBI take this decision. However, it
is important to note that a further reduction in policy rates are not
automatic.
Industry as a whole will be helped, particularly the housing sector and
will provide a fillip to growth.
N. Jayakumar, MD, Prime Securities: RBI has relayed a positive
surprise. First it cut the cash reserve ratio by 75 basis points in
January and now with 50 bps cut in the repo rate. The RBI has several
sets of eyes on growth and does not function under pressure from the
government. RBI is not known for histrionics.
Devendra Kumar Pant, Director, Fitch Ratings: Although the headline
inflation is slightly high at 7 percent, the core inflation had fallen
below 5 percent, which aids the argument to lower interest rates. The
question was whether to wait until inflation was down to the RBI’s
target of 4 percent or take a decision based on forward looking
statistics. The RBI has achieved its target of compressing demand to a
certain extent and has taken this step to revive the economy. The 50
basis point reduction came as a surprise as the markets were expecting
a 25 base points cut at the most. This will be beneficial to interest
sensitive sectors like automotive and real estate.
Sajjid Chinoy, India economist, JP Morgan: “I am skeptical of
transmission from policy to market cuts,” which means bank loans are
unlikely to become cheaper.
“I don’t expect more cuts from the RBI. We don’t need bold steps from
RBI but from Delhi, in terms of easing supply bottlenecks. Monetary
policy should not be responsible for doing what policymakers in Delhi
are supposed to do. RBI doesn’t need to take on the mantle of all that
Delhi doesn’t do,” Mr. Chinoy said.
ASSOCHAM: Industry chamber ASSOCHAM hailed the RBI’s move to cut repo
rate by 50 basis points and said reversing the tight monetary policy
will give a push to economic growth.
“This has set the stage for cheaper lending costs and created an
investment climate which could even possibly reverse inflationary
pressures,” said secretary general D.S. Rawat.
High interest rates have been discouraging fresh investments and
industrial production for nearly two years now. The RBI has acted
vigorously to reverse the slowdown, Mr. Rawat said.
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