Mumbai: In a move that may not bring any relief to home and car loan seekers, the RBI on Friday cut the interest rate by a meagre 0.25 percent and kept cash reserve ratio (CRR) unchanged on concerns of inflation, disappointing industry and stock markets.
Reserve Bank's decision to cut interest for the third time since January as part of the annual credit policy, evoked a cautious response from Finance Minister P Chidambaram who said, "lets accept what has been done today".
The bank lowered the short-term lending (repo) rate to 7.25 percent from 7.50 percent, lowest since May 2011 while retaining the CRR for banks unchanged at 4 percent.
RBI Governor D Subbarao while unveiling the annual monetary policy pegged the growth rate for the current fiscal at a conservative level of 5.7 percent saying, "economic activity during the current year is expected to show only a modest improvement over last year, with a pick-up likely only in the second half of the year."
Speaking on the impact of the rate cut on retail and corporate loans, Pratip Chaudhuri, chairman of the country's largest lender State Bank of India said, "there is no scope (for a lending rate cut now)." His views were shared by other bankers too who ruled out the possibility of rate cut in the immediate run.
According to Subbarao: "The balance of risks stemming from the Reserve Bank's assessment of the growth-inflation dynamics yields little space for further monetary easing".
Describing the high Current Account Deficit (CAD) as "by far the biggest risk to the economy", he said, "monetary policy will also have to remain alert to the risks on account of the CAD and its financing, which could warrant a swift reversal of the policy stance".
While unsatisfied industry pitched for bolder measures from RBI in future, the Bombay Stock Exchange (BSE) declined by 160 points or 0.81 per cent following the policy announcement.
Justifying the limited easing, Subbarao said "monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping public investment".
The upside risks to inflation, which cooled to a three- year low in March, "still remain significant" in the near term on suppressed inflation on the energy front, Subbarao added.
The central bank expects inflation to hover broadly around the 5.5 percent mark in the current fiscal and said it will deploy "all instruments at command" to bring it down to 5 percent by March next year.
Referring to the Cobrapost sting on the country's top three private banks allegedly helping launder money, the RBI said the ongoing investigations have underlined the need for better regulatory compliance by banks.
It said banks are not carrying out customer due diligence while marketing and distributing third-party products.
The decision to leave the CRR unchanged seems to have been driven by an improvement in liquidity deficit, as the banks are now drawing around Rs 84,000 crore from the overnight window compared to Rs 1.8 lakh crore late last fiscal.
After the policy, Chidambaram said "It (RBI) also announced rather liberal OMO (Open Market Operations). If the inflation trend down further...That will decide scope for further policy action".
The RBI projection of 5.7 percent GDP growth this fiscal drew sharp reaction from Planning Commission Deputy Chairman Montek Singh Ahluwalia who said the central bank was being more pessimist than the government.
On customer services, the RBI asked banks to stop differential treatment for home-branch and non-home branch customers, apart from asking banks to price retail loans at uniform rates.
With falling gold prices making lenders uncomfortable, it asked banks not to lend against gold coins above 50 grams.
RBI expects non-food credit growth to pick up marginally to 15 percent in 2013-14 from 14 percent year-on-year and deposit mobilisation to be flat at 14 percent.