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What propelled the rate cut

At last, the much awaited rate cut by the RBI has come. Having announced a cut of 25 basis points in repo rate, many sectors are talking about the possibility of cheaper credit flow from banks and financial institutions. Being the ‘maiden’ policy review announcement after the setting up of the Monetary Policy Committee (MPC), the cut assumes significance.

Translating the cut into clear reduction in lending rates of banks and passing it on to the ultimate borrower is the acid test. ICICI Bank, the largest private sector bank, has announced a 5 basis point reduction in its Marginal Cost of funds-based Lending Rates (MCLR). Other banks, both public sector and private sector, will announce reductions in the next few days, as is the usual practice.

Top executives of many banks have reacted favourably to the RBI’s pronouncement and this will be translated into press releases/administrative clearances within a short span of time. Industry leaders have welcomed the rate cut and hoped for substantially cheaper loans to industry.

Some of them have termed the rate cut as a festival gift. The auto sector honchos have stepped up their sales targets already. The Bombay stock market has reacted positively with a 91 point rise in index on the trot. The rupee too got strengthened by 12 points on the date of the policy review.

Favourable factors

The press release from the Reserve Bank has listed favourable factors for the rate cut as follows:

Inflation under check

Stability in commodity prices

Increase in monsoon rain

Enhanced agriculture activity

Positive government initiatives

Increased investment in construction and infrastructure

Control in oil prices

Industrial production sentiments

Cash surplus with the salaried/pensioner class due to implementation of 7th Pay Commission recommendations giving substantial rise in salaries and pension and its impact.

From the above, it can be seen that the policy announcement has been swayed by the positive outlook for the ‘busy season’ activities and the need for cheaper credit flow to the vital sectors.

As far as the housing and construction activities are concerned, they are not ‘seasonal’ but almost continuing, which implies that credit needs too are more or less permanent. Support to agriculture can lead to increased cash with the rural sector, propelling the demand for goods, services and transport. This means even a marginal reduction in the MCLR can have multiple effect on the economy. However, only an across the board reduction in the housing loan portfolio can benefit the sector as a whole, rather than a reduction in loans considered henceforth.

NPAs’ management

In the same breadth of repo reduction, the concern for controlling/managing NPAs has also been pointedly referred to by the RBI. This calls for stricter and efficient management of bulk housing loans, which contributes to a fairly high percentage of the portfolio and attracts recovery proceedings.

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Printable version | Jan 22, 2022 2:10:48 AM |

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