The Reserve Bank of India cut its key lending rate by 25 basis points on Friday but bankers said that it was too small to have any impact on retail lending rates immediately.

Stock markets reacted adversely to the policy with the S&P BSE Sensitive Index tanking by 160 points to close at 19,575.64.

“There is no scope to cut rates. It will depend on the banks if they want to increase credit. As of now, each bank has to assess the competition and their standing. There is nothing to transmit,’’ said Pratip Chaudhuri Chairman, State Bank of India.

The RBI reduced the indicative policy rate (repo rate) from 7.50 per cent to 7.25 per cent. However, it kept the Cash Reserve Ratio (CRR), the portion of total deposits banks are mandated to keep with the central bank, unchanged at 4 per cent. The RBI had cut the CRR in the last nearly one-and-half years by 200 basis points.

Including the latest one, the RBI has cut the repo rate by 125 basis points (one basis point is one-hundredth of a percentage point) in the last one year. The hefty 50 basis points cut in April 2012 was followed by 25 basis point cuts each in January and March this year. Repo rate is the rate at which banks borrow funds from the central bank.

The market was disappointed with the policy announcement of the RBI as it was expecting a cut in CRR along with a cut in the repo rate. “The growth has decelerated continuously and steeply…….It is important to note that food price pressures persist, and supply constraints are endemic. These could lead to generalisation of inflation and strains on the balance of payments,” said D. Subbarao, Governor, RBI, while addressing a press conference to announce its Annual Monetary Policy for 2012-13.

The RBI Governor said that the decision to further cut the repo rate carried forward the measures put in place since January last year towards supporting growth in the face of gradual moderation of headline inflation.

But he said that it alone “cannot revive growth …. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation.”

“Monetary policy cannot afford to lower its guard against the possibility of resurgence of inflation pressures. Monetary policy will also have to remain alert to the risks on account of the current account deficit (CAD) and its financing, which could warrant a swift reversal of the policy stance,” RBI warned.

He also said that the biggest risk to the economy stemmed from the CAD which, last year, was historically the highest, and well above the sustainable level of 2.5 per cent of gross domestic product (GDP) as estimated by the central bank.

Dr. Subbarao said that the central bank’s assessment of the growth-inflation dynamic yielded “little space for further monetary easing.” However, he said that it would endeavour to actively manage liquidity to reinforce monetary transmission, but not through a cut in CRR.

The RBI projected the GDP growth for 2013-14 at 5.7 per cent.

The Central Statistics Office (CSO) put out the advance estimate of GDP growth for last year, 2012-13, of 5 per cent, lower than the RBI’s January 2013 projection of 5.5 per cent. The CSO’s lower estimate reflects slower-than-expected growth in industry and services.

As per RBI’s assessment, wholesale price index (WPI)-based inflation is expected to be range-bound around 5.5 per cent during 2013-14. This assessment factors in the domestic demand-supply balance, the outlook for global commodity prices, and the forecast of a normal monsoon.

The RBI Governor summarised that growth slowed much more than anticipated, with both manufacturing and services activity hamstrung by supply bottlenecks and sluggish external demand. Inflation eased significantly in the fourth quarter of last year although upside pressures remained, both at the wholesale and retail levels, he pointed out.

“I expected RBI to front-load on repo rate cut because going forward, it will be difficult for them to justify a rate cut. So, if there was a 50 bps cut, there could have been a transmission,” said S. S. Mundra, Chairman and Managing Director of Bank of Baroda.

SBI’s chief, Mr. Chaudhuri said: “Home and car loans continue to be strong, and till such time that we have enough deployment there, we do not think there is any compulsion to cut rates.”

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