Wednesday 10 December 2014

RBI plays safe on Credit Policy

Experts say that the RBI's decision not to cut policy rates was expected, although it disappointed stakeholders of the sector.

The RBI left repo rate unchanged at 8% and reverse repo rate at 7% in its bimonthly review of credit policy. The CRR, too, remains the same at 4%.
With moderation of inflation there was great expectation in the industry that the RBI would cut interest rates in its bimonthly monetary policy, Sachin Sandhir, global MD (Emerging Business) and MD (South Asia) of RICS, said. A rate cut at this stage would have galvanized market sentiment and helped in growth he said.

Rate cut will help companies with huge debt on their books.This would have helped companies in the real estate space, too, which are currently reeling under high levels of debt.

However, consultants say that RBI's decision to not cut key policy rates comes along expected lines, as recent economic data suggests that the much anticipated headroom for easing policy stance is still some way away.

While growth rate of the economy has slowed, the apex bank continues to be cautious in its fight against inflation and deepening financial stress due to banks' non performing assets.

As the RBI governor already said in his previous monetary policy announcement that he would look at base effect while considering rate cut, the move is well intentioned.

Driven by softening of fuel and food prices, the wholesale price inflation dropped for the fifth consecutive month--to 1.77% in October--its slowest since October 2009.

Retail inflation at 5.52% has been the slowest since January 2012.

Prime concerns like food inflation fell to 2.7% in October, from 9.6% in May--its lowest level since February 2012.

Interestingly, the RBI was hoping to contain retail inflation at 8% by January 2015 and to 6% in January 2016.

DTZ, a consultancy firm, said it hoped that the central bank would soon start cutting interest rates to bring down the cost of money, so that investment becomes more attractive. It said the cut in interest rates are a few more months away and the government's efforts to boost infrastructure would certainly make for a compelling case for a rate cut in RBI's next policy announcement in February next year.

J P Gupta, vice-president of Credai-NCR-Haryana said: “We have full faith in the new government and the RBI, but keeping interest rates unchanged is disappointing. With inflation largely under control, cheaper housing loans were the need of the hour.They not only fulfill aspirations, they also have a ripple effect on growth. Housing affects demand in several other industries and would have boosted the overall sentiments in the market."

Source: Times Property, Dec 06, 2014

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