The Reserve Bank of India slashed both repo rate and cash reserve ratio (CRR) by 25 basis points as per expectations. However, Montek Singh Ahluwalia, Deputy Chairman, Planning Commission feels that the monetary policy review alone cannot change the macroeconomic situation.
Ahluwalia also stresses that it is incorrect to believe repo cut helps banks to cut lending rates.
In an exclusive interview to CNBC-TV18, he says "The CRR cut provides more resources with the banks and enables the bank to do more lending. It is the availability of these resources that will ultimately reflect in the longer term interest rates. The short-term repo rate is only a signal."
Here is an edited transcript of his comments.
Q: We have seen a 25 basis points repo rate as well as cash reserve ratio (CRR) cut. Is this as per your expectations, better than your expectations? Do you believe this is adequate to revive and turnaround sentiment from a larger macro economic point of view?
A: The monetary policy adjustment is not the only thing that is going to change the macro economic situation. There are many other things that have to happen and they are happening. As far as the steps that the RBI has taken they are definitely in the right direction. They signal the fact that the RBI, having looked at what has happened in policy in the last three-four months, is now convinced that first of all the government has created the fiscal space that it was always keen on before it took monetary action.
Q: While we have seen a declining trend in inflation and that certainly has given the RBI room to actually go ahead and implement that cut but he is saying that you cannot de-emphasise the inflation factor at this point in time. If the government is firm in its resolution to actually hike diesel prices, we don’t know if you will go through monthly hikes. Perhaps there is a question mark really on inflation and hence his decision to only cut by 25 bps now and another 25 bps by March?
A: I don’t want to speculate on what it will do in March. The most important thing from the economy’s point of view is that the CRR cut provides more resources with the banks and enables the bank to do more lending. It is the availability of these resources that will ultimately reflect in the longer term interest rates. The short-term repo rate is only a signal. I don’t believe that cutting repo rate does more than signal the fact that the RBI now feels inflation is coming under control. The RBI now feels that there is fiscal space being created and also that what the government is doing is taking care of some of the other impediments on growth.
Q: You were talking about lending rates, interest rates and banks being able to move on lending more as well as cutting down interest rates but bankers that we seem to speak to don’t seem to be as confident of being able to reduce lending rates just yet, they don’t believe that 25 bps is enough. Yes they were expecting the CRR cut so that certainly helps because there is more liquidity in the system but are public sector banks going to gently being nudged by the government to start the rate cutting cycle?
A: This notion that how much the repo rate is cut leads directly to the banks lowering their lending rate is actually not a correct linkage. It is not as if when the repo rate is cut that the banks can automatically borrow at a low rate and lend it at a low rate in the market. The rates that have to go down are the longer term rates. Those rates remain high. What the RBI has done is it has allowed the banks to put more money into the market and when the banks put more money into the market they will be able to put more money at somewhat lower rates may be for some of the better borrowers.