The Reserve Bank of India on April 5 cut the repo rate by a further 25 bps and also took measures to ease the liquidity constraints in the banking system. It seems to be giving hopes for the industry and consumers that interest rates in the economy will fall faster than earlier.

Actions taken by RBI include:

• It cut the policy repo rate by 25 basis points from 6.75 percent to 6.5 percent;
• It reduced the minimum daily maintenance of banks’ cash reserve ratio (CRR) from 95 percent of the requirement to 90 percent with effect from the fortnight beginning 16 April. CRR is the proportion of deposits banks need to keep with the RBI. It has kept the CRR unchanged at 4 percent of net demand and time liabilities (NDTL).
• It narrowed the policy rate corridor from +/-100 basis points (bps) to +/- 50 bps by reducing the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points, with a view to ensuring finer alignment of the weighted average call rate (WACR) with the repo rate;

Two of the steps – on reverse repo and CRR – are aimed at increasing the liquidity with banks. With more cash in hand, banks should be able to cut rates at a faster clip. With the cut, the repo rate has hit the lowest in six years.

Given weak private investment in the face of low capacity utilisation, a reduction in the policy rate by 0.25 per cent will help strengthen growth, RBI Governor Raghuram Rajan said in the first bi-monthly monetary policy review for the 2016-17 fiscal, which began on April 1.

Commenting on the development, Chairman of the EEPC India T S Bhasin said while both the Reserve Bank and the government realise a grave situation for the export sector, no big measures have been forthcoming for providing any relief to the sector, so precious for the country’s foreign exchange. On the contrary, certain policies like excessive protection to the large steel manufacturers have resulted in increase costs in the exports products, particularly in the engineering sector.

On its part, the RBI has not provided any special window for the export sector which has been witnessing drop for the last 15 months.  Exporters see the RBI policy another opportunity lost for reviving exports by lowering costs of borrowing significantly and providing them some relief, Mr Bhasin said.

While welcoming 25 basis points cut in repo rate by the Reserve Bank of India, President, PHD Chamber, Dr. Mahesh Gupta, said, “the move would stimulate demand, augment buying of consumer durables vis-a-vis reduced costs of credit, boost investments and growth of manufacturing sector”.

However, the move should continue in the coming times also and repo rate should not be more than 6%, said Dr. Gupta.

Keeping in view the WPI inflation in negative trajectory (around (-) 0.9% in February 2016  and CPI inflation in the comfortable zone (about 5.1% in February 2016), it becomes inevitable that interest rate environment is in sync with declining inflationary scenario, added Dr. Gupta.

Time is most opportune to strengthen the sentiments of industry and facilitated to grow in double digits in the coming times. Refuelling demand scenario would strengthen industrial growth trajectory and create jobs for millions of young work force, said Dr. Gupta.

Repo rate must not be more than 6% to induce demand and refuel industry growth at this juncture. Therefore, an aggressive move to cut repo rate is needed at this juncture to facilitate industrial growth, added Dr. Gupta.

Welcoming the reduction in repo rate by 25 bps, Harshavardhan Neotia, President FICCI said, “RBI’s decision to cut the repo rate and follow accommodative monetary policy stance is a positive step, given the favourable conditions with respect to inflation and fiscal stability. FICCI has for long advocated the need for greater cuts in the policy rate to stimulate demand and investments in the economy.”

“Additionally, several steps announced to ease liquidity should help in effective transmission into lending rates by the banks. The banks already have enough room to pare the lending rates owing to recent reduction in small savings interest rate upto 1.3 percent as well as the introduction of the marginal cost of funds based lending rate (MCLR). We now look forward to banks taking the lead in supporting the investment cycle and improving economic growth”, added Neotia.