In a bid to revive falling growth, the Reserve Bank of India (RBI) on Friday slashed the repo rate — the rate at which banks borrow from the central bank — by 0.25 percentage points to 7.25%, but consumers reeling under the burden of high equated monthly installments (EMIs) have nothing to cheer about as banks are unlikely to cut lending rates anytime soon.
Lenders have said that the cost of funds continues to remain high, thereby hurting banks’ ability to lower lending rates. “The liquidity situation is tight,” said Shikha Sharma, CEO, Axis Bank. “Transmission (of rate cut) will be difficult till the cost of funds come down.”
Though the central bank reduced its key lending rate for the third time since January, it struck a hawkish tone saying there is little room for further reductions and that rate cuts should be supported by concrete steps taken by the government to revive growth and remove bottlenecks.
“With upside risks to inflation still significant in the near term in view of sectoral demand-supply imbalances, on-going correction in administered prices and pressures stemming from MSP increases, monetary policy cannot afford to lower its guard against the possibility of resurgence of inflation pressures,” said D Subbarao, governor, RBI.
“Overall, balance of risks stemming from RBI’s assessment of the growth-inflation dynamic yields little space for further monetary easing,” he added.
The central bank left the cash reserve ratio — the proportion of funds banks have to park with RBI — unchanged at 4%.
Aided by a fall in global commodity prices and a drop in demand, inflation has recently started to decline. Wholesale prices-based inflation fell to a three-year low of 5.96% in March, but is still high from RBI’s near-term target of 5% and medium-term target of 3%. The central bank expects WPI inflation to be range-bound at around 5.5% during 2013-14.
RBI’s decision to cut the repo rate was aimed at reviving a falling GDP growth, which declined to 4.5% in third quarter of 2012-13 from 9.2% in fourth quarter of 2010-11.
The central bank projected a GDP growth of 5.7% for 2013-14 and said it expects a modest recovery in the later part of the year.
“The stance of monetary policy is intended to address the accentuated risks to growth; guard against the risks of inflation pressures re-emerging and impacting expectations, even as corrections in administered prices release suppressed inflation; and appropriately manage liquidity to ensure adequate credit flow to productive sectors of the economy,” RBI said.