The stance taken by the Reserve Bank of India (RBI) to continue the status quo in policy rates was welcomed by bankers on Tuesday while hoping that a rate cut in early 2015 would initiate a credit off-take.
“The RBI assertion of a possible change in monetary policy stance next year is a clear vindication and acknowledgement of a benign inflation regime,” said Arundhati Bhattacharya, Chairman, State Bank of India.
“In fact”, said Ms. Bhattacharya, “by advancing the inflation target of 6 per cent to March 2015, RBI has now set out a clear message of the reversal of the rate cycle, sooner than later.”
With oil prices at historic lows, a stable exchange rate and strong capital inflows, the feel good factor is here to stay, she added.
“RBI’s policy today kept the repo rate unchanged indicating no change in the policy stance for the time being. Though a rate cut would have cheered the Industry, RBI decided to wait for clear and sustainable trend from the inflation front as well as from the fiscal front,” said T.M. Bhasin, Chairman Indian Banks’ Association (IBA) and Chairman & Managing Director of Indian Bank.
For the banks, Mr. Bhasin said that low credit growth is a cause of concern. Bank credit growth, for the current year up to November 14, stood at 4.3 per cent as against 7.1 per cent of the previous year. Year on year growth was just 11 per cent as against 15.1 per cent of the previous period. Deposit growth at 7.1 per cent was higher than the credit growth of 4.3 per cent during the current financial year so far.
Moreover, big corporates are resorting to raising money through Commercial Paper which stood at Rs 2287.5 billion on November 15, 2014 as against Rs. 1752.2 billion on November 15, 2013. With sufficient liquidity and not much demand for bank credit, after the fourth bi-monthly policy statement, many banks have reduced their deposit rates. “This trend is quite likely to continue in this quarter also,” Mr. Bhasin added.
Though banks have not reduced lending rate as such after the fourth bi-monthly policy, many have reduced the spread in their retail portfolios. In the policy statement RBI has indicated that the revival of investment demand depends on the removal of the constraints in the infrastructure sector.
“This is quite significant for the banking industry because, commercial banks are the second largest source of finance for infrastructure in the country,” said Mr. Bhasin, adding, “With the success of the on-going efforts made by the government towards removal of impediments in infrastructure, banks could look forward for a buoyant credit growth in the coming months.”
“The policy signals RBI’s resolve to firmly contain inflation and inflationary expectations, while responding to positive developments in inflation and fiscal consolidation”, said Chanda Kochhar, MD & CEO, ICICI Bank.
The statement that a change in monetary policy stance is likely early next year if the current positive trends continue is very welcome, said Ms. Kochhar, adding. “The economy has already received a tremendous boost in terms of sentiment and confidence.”
According to her, the results of government actions to energise investment activity should start playing out in the coming months. “As this happens and interest rates moderate, we should see an improvement in growth going forward.”