The less than expected rate cut in Repo – a rate at which the RBI lends money to commercial banks in the event of any shortfall of funds, disappointed many analysts and market watchers who expected a rate cut at least to the tune of 50 basis points.
Commenting on this RBI’s announcement, Shishir Baijal, Chairman and Managing Director, Knight Frank India says, “We welcome this move and we believe it’s a step in the right direction. With a 25 bps cut in the repo rate, the key policy rate is now down by 75 bps this calendar year. However, we also think that an additional reduction in the CRR would have given a bigger boost to the struggling real estate sector by improving its cash crunch scenario. Moreover, it could have also increased the possibility of banks slashing their lending rates to benefit their borrowers.”
RBI has cut rates third time during this year as inflation remains under the comfortable limits.
Keeping the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL) and reducing the Repo rate, the Central bank is expecting that rate cuts should help revive growth and investment cycle.
The micro, small and medium enterprises (MSMEs) of the country, considered as the back bone of Indian economy, are waiting for the banks to pass on the rate cut to MSMEs.
“Banks passed the benefit of only 25 basis points to MSMEs which is half of reduction done by RBI on last two occasions. Now with third rate cut, Banks should reduce interest rates charged from MSMEs by one percent,” demanded MSME entrepreneur and Executive Committee Member of Federation of Indian Micro and Small & Medium Enterprises (FISME), Naveen Jain.
The MSME sector contributes over 37 per cent to India’s GDP. It is estimated that by March 2014 the total outstanding bank advances to MSME sector stood over Rupees 10.34 lakh crore.