RBI rejected bankers' plea for rate cut in pre-policy meet
The Reserve Bank of India clearly rejected bankers' suggestion to slash policy rate by 25-50 basis points, in its half yearly monetary policy review. Five out of six banks actually wanted the central bank to cut the policy (repo) rate by 25-50 basis points. Lenders felt the urge to push for demand in the economy.
November 22, 2012 / 10:29 AM IST
The Reserve Bank of India clearly rejected bankers' suggestion to slash policy rate by 25-50 basis points, in its half yearly monetary policy review. Five out of six banks actually wanted the central bank to cut the policy (repo) rate by 25-50 basis points. Lenders felt the urge to arrest the declining demand in the economy by reviving investments.
RBI continues to prioritise inflation over growth and slashed the cash reserve ratio by 25 basis points in its half year monetary policy announced on October 30. Repo is the rate at which banks borrow money from RBI.
"On monetary policy and liquidity measures, five of the six external members suggested that the Reserve Bank should reduce the policy rate. They felt that even though inflation is sticky, there are no demand pressures and there is a need to revive investments," RBI said in a release issued on Wednesday detailing the minutes of the technical advisory committee (TAC) meeting held on October 23, 2012.
Out of those five banks three recommended a cut of 25 bps in repo rate while two preferred a sharper one of 50 bps. The sixth member however, did not see any change of monetary policy stance.
The rationale behind the rate cut plea, as given by banks, were two-pronged: that higher growth would help in reducing the fiscal deficit; and a repo rate cut would enable lenders to bring down lending rates without reducing deposit rates. Hence, depositors would continue to enjoy higher rates.
Banks were unanimous on the fact that aggregate demand is weakening and credit and money supply growth are below the RBI's projections. Industrial growth has been stagnant for nearly nine months. Slowdown is hitting the domestic economy significantly.
"Capacity utilization is low, capital goods production has fallen significantly, investment intentions show no signs of revival and the economy seems to be operating significantly below potential," they observed.
Meanwhile, bankers were divided in assessing the global economic conditions. While three of them saw recession creeping back globally with turmoils in European Union and Japan, other two sensed chances of growth in the next two quarters.