Corporate India survived a scare on Tuesday as Reserve Bank of India Governor Y Venugopal Reddy left rate indicators like the repo rate unchanged but tightened money supply in the economy by increasing the cash reserve ratio.
Reddy had hiked the cash reserve ratio (the portion of their available cash that banks have to keep with the RBI) 12 days back by 0.5 percentage points and now has increased it again by 0.25 percentage points. The entire exercise has sucked around Rs 27,000 crore out of the system.
Reddy, however, did not raise any of the key interest rates – repo rate (the rate at which the RBI lends to banks) and reverse repo rate (the rate that RBI pays banks on overnight deposits). The inflation target for the fiscal has been raised to 5.5 per cent from 5 per cent last year. A rate increase would have sent a signal to the banks to hike their rates immediately. Instead, the RBI has just decided to squeeze the cash a little more and left the banks to take their own call.
Pawan Munjal of Hero Honda sums up the relief. He said: “The two-wheeler industry cannot take any more hikes in interest rates. We have already seen are margins being squeezed.” Subodh Bhargava of Eicher Motors said: “There isn't any tinkering with the rates. That's better.”
So are the rates not moving up? Surely the public sector banks are not likely to go ahead and announce a rate hike, but private sector banks might take the lead. “We think that interest rates are primarily a function of evolving market liquidity conditions and our cost of funds. We will continue to monitor these variables before taking any decision on interest rates,” said Chanda Kochhar, Joint Managing Director & CFO, ICICI Bank Ltd.
“It (CRR hike) is only a signal that the excess funds in the system will be contained. This instrument gives more flexibility to RBI than interest rates,” said MBN Rao, CMD of Canara Bank and chairman of Indian Banks’ Association.
The RBI on Tuesday not only spared borrowers from interest rate hikes, but extended the priority sector privilege to home loan borrowers up to Rs 30 lakh from Rs 20 lakh earlier. The Sensex closed at 17,378, up 362.5 points, giving a thumbs up to the policy announcements and the finance ministers sops to industry.
DK Joshi, the chief economist and director at rating agency CRISIL said: “Avoiding interest rate hike, which would have affected the already slowing growth pace, is a good policy”. Reddy has pegged the growth target for the economy at 8-8.5 per cent for the year. KV Kamath, MD and CEO ICICI Bank said: “I don't see a slowdown in investments. It (CRR hike) will not hurt growth. Corporate India's profitability has been good. We will get a better picture in July, when the numbers for this quarter come in.”