The Reserve Bank of India (RBI) announcement of a cut in repo rate by 25 basis points from eight per cent to 7.5 per cent and reduction in the cash reserve ratio (CRR) by 25 basis points from 4.25 per cent to four per cent in its third quarter monetary policy review hasn’t come a day too soon.
In fact, it was a long-expected and much-awaited policy decision in view of the long-felt need to liberalise credit availability to spur industrial activity by stepping up flagging aggregate demand for funds and also ease supply constraints. While the repo rate cut would provide more elbow room for banks to reduce interest rates, the CRR reduction would ensure infusion of Rs. 1,800-crore liquidity into the system from February 9.
All industry associations without exception were quick in reacting to the RBI action most favourably, quite convinced that RBI is ready to promote growth besides anchoring inflationary expectations. Commenting on the RBI move, Dr. Pawan Goenka, President, Automotive and Farm Equipment Sectors, Mahindra & Mahindra Ltd., said: “Today’s combo of a repo as well as CRR cut is a welcome announcement and hopefully will help revive investments in the core sectors. I see this as a good beginning”.
Banks’ response too was quick and encouraging. Among the first to cut lending rates were the State Bank of India, IDBI Bank, Royal Bank of Scotland, National Housing Bank, HDFC Bank, ICICI Bank and Bank of India, rekindling widespread hopes that home and auto loans are sure to become cheaper. True, both the real estate and auto sectors are passing through a very critical phase with a general slump in demand caused mainly by shortage of funds. Most of the banks announced a cut in loan rates by 0.5 percentage point for different categories of vehicles which may spur demand to a certain extent. However, auto industry circles have their own reservations on the issue, stating that the RBI move is more of a sentiment rather than being something that will have a big impact on the market. For, only in December last did a few banks reduce vehicle loan rates by even 50 basis points, but of no await.
Viewed against the current overall slowdown, there is no room for complacency. However, a section of the industry is still steadfast in its belief that the liquidity in the economy would positively improve on the back of reduced rates and that the anaemic industrial growth witnessed over the last year would hopefully be reversed. Time alone will tell whether industry in general, and the auto sector in particular, would positively respond to the RBI bid to make a beginning towards bringing the economy back on track. The issue assumes special significance at a time when the Indian auto sector is eagerly looking forward to fresh sops for its revival in the forthcoming Union Budget.