RBI cuts CRR; home, auto loans set to become cheaper

MUMBAI: Home and auto loans will gradually become cheaper over the next few months with the Reserve Bank of India announcing a cut in the cash reserve ratio (CRR) by a quarter of a percentage point (25 basis points) to 4.5% in its policy review meeting on Monday. The central bank, however disappointed industry by leaving its key policy rates —repo and reverse repo —unchanged, mainly because of a sudden spike in the rate of inflation for August.

Repo rate is the rate at which banks borrow money from RBI in case they are short of funds, while reverse repo rate is the rate of interest banks get when they park their surplus funds with the central bank. CRR, on the other hand is the liquid cash that banks need to keep with the RBI to meet any emergency cash requirement and the central bank does not pay any interest to banks on this money.

Once rate of inflation starts falling, which corporate heads and economists believe could happen around Diwali in November, interest rates would come down at a faster clip, benefiting consumers, home and car buyers as well as corporate entities.

Chances of a cut in interest rates by banks for consumers lifted stocks of consumer industries like automobiles and real estate and led to a 78-point rise in the sensex. The rupee too reacted positively, breaking above the 54 mark to the dollar, a 4-month high, in intra-day trades but closed at 54.01 to a dollar, compared to 54.31 on Friday.

The RBI, in its statement said that the cut in CRR would release around Rs 17,000 crore into the economy, meaning banks will have this much extra money to lend to their borrowers. "Given the comfortable liquidity and the recent reduction in deposit rates by banks, interest rates in general could be expected to trend downwards gradually," said Chanda Kochhar, MD & CEO, ICICI Bank. "However, we will have to continue to keep an eye on funding costs given the level of CASA deposit growth in the system," Kochhar said.

India Inc could also take succour from finance MinisterP Chidambaram statement that the government would take further steps in the next one and a half months to bring more fiscal discipline, while indicating that the response of the central bank on October 30 will be more supportive of growth. Corporates still want more. "A major stimulus in reduction of interest rate and implementation of these policy changes hold the key to long-term sustainable growth," Harsh Goenka, chairman, RPG Enterprises, said.

Economists expect that the RBI will soon decide to buy government securities from the market, called open market operations (OMOs), which would leave even more funds with banks to lend. At a time when credit offtake is slow, the combined impact of CRR cut and OMOs could eventually lead to much greater availability of funds in the system, which in turn could lead to a 50-100 basis points (bps) drop in the rates of interest in the economy, economists TOI spoke to said.

"The policy stance remains cautious given the current high headline inflation and the high chance of the headline print going up further in coming months," said Siddhartha Sanyal, India economist, Barclays Capital. Of late the central bank has been using the liquidity enhancement measures more often (it cut CRR in January, March and now in September and cut SLR in April and exports credit refinance in June) than going for a cut in key policy rates. "The RBI policy of late suggests its hesitation to use the headline repo rate at the moment, while the central bank remains more comfortable easing the liquidity measures further," Sanyal said.

Economists also believe that the cut in CRR has the potential to boost the profitability of banks by about Rs 2,000 crore, since this would lower the amount of non-interest earning cash with the RBI.

In addition to the increasing chances of a fall in rate of interest, the corporate sector is also enthused by RBI's slightly dovish statement now, which accommodates the general concern about the slowdown in economic growth, compared to its earlier stance that earned it the sobriquet of an inflation hawk. "RBI's mid quarter policy statement appears more dovish than its previous statements this year, possibly resulting from recent positive fiscal actions," said Ajay Srinivasan, chief executive—financial services, Aditya Birla Group.

In its statement, the central bank acknowledged that monetary policy also had an important role in supporting the revival of growth in the economy, but given the persistently high inflation, along with risks emerging from twin deficits (current account and fiscal), a stronger monetary policy to perk up growth may even backfire.