Rajan holds policy rates, for now - Times of India

The author has posted comments on this articleTNN | Dec 19, 2013, 03.24AM IST

MUMBAI: Emboldened by the Reserve Bank of India's move to hold rates, banks may tweak home and auto loan pricing to give borrowers better deals as credit slows down. Governor Raghuram Rajan surprised markets and bankers by not raising the policy rate at a time when the debate was whether he would increase it by 25 basis points (bps) or 50 bps. An expected fall in vegetable prices restrained the governor from hiking the policy rates but he warned that RBI will not wait till the next monetary policy review to increase rates if prices do not fall.

The governor also painted a gloomy scenario for industrial growth and warned that a slowdown in government spending in the last quarter would hit growth. "The weakness in industrial activity persisting into Q3, still lacklustre lead indicators of services and subdued do mestic consumption demand suggest continuing headwinds to growth," Rajan said in his policy. Tightening of government spending in the fourth quarter to meet budget projections will add to these headwinds. Stating that growth in the second half was expected to be better thanks to agriculture and exports, Rajan said that revival of stalled investment, especially in the projects cleared by the Cabinet Committee on Investment, will be critical.

According to State Bank of India chairman Arundhati Bhattacharya, the country's largest lender may tweak its home and auto loan rates given the slowing demand in November. However, it is unlikely to revise its base rate which was hiked recently. "Banks have been offering low rates on home and other small loans as part of campaigns. Now with RBI not hiking rates, these campaigns may continue until March. We may also look at widening the coverage of these loans by for instance increasing the Rs 30 lakh basket to Rs 60 lakh," said M Na rendra, chairman, Indian Overseas Bank.

For businesses there is relief that cost of funds will not burden them at a time when demand is falling. Banks hope that steady rates will encourage businesses and consumers to borrow more. There is also the prospect of better profits through improved margins and appreciation in the price of their bond holdings. For savers, however, bank deposits remain unattractive as they will continue to provide a negative rate of return.

In the stock exchange, interest-rate sensitive banking and realty stocks soared following the central bank's decision. The benchmark sensex closed 248 points higher at 20,860, up 1.2% from its previous close. The yield on the benchmark 10-year bond fell by 15 basis points to 8.76% intraday before closing at 8.78%. The rupee too gained above the 62 levels in early trade, but weakened sharply towards closing to end the day at 62.11 against the dollar, down 9 paise from its previous close. Among the banking stocks, Canara Bank rallied 5.4%, while Bank of India gained 5.3%. Shares of Punjab National Bank were up by 4.3% while private sector Indusind Bank jumped 3.7%.

"The decision is understandable in some ways - it should probably be seen partly as an acknowledgement that the central bank has little or no control over food prices - but nevertheless a brave one. The market could easily take the view that Rajan has missed an opportunity to build his anti-inflationary credentials and should be considered more "dovish" than previously thought. Also, with the Fed set to announce its tapering decision tonight, the bank could be forced into a quick intra-meeting move if the rupee were to take a renewed battering as a result," said Robert Prior-Wandesforde, director of Asian economics research at Credit Suisse.

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