Interest rate sensitive sectors like Auto will feel the heat of no rate cut: Zyfin Research

RBI Governor Raghuram Rajan decided not to alter the repo and reverse repo rate, contrary to popular pressure.

Dec 02, 2014 02:12 IST India Infoline News Service

On the basis of an assessment of the current and evolving macroeconomic situation, RBI has decided to:
  • Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0%.
  • Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0% of net demand and time liabilities (NDTL).
  • Continue to provide liquidity under overnight repos at 0.25% of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system through auctions.
  • Continue with daily one-day term repos and reverse repos to smooth liquidity.
  • Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0%, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0%.
While it was largely expected of the governor Raghuram Rajan, not to bow down to the pressure of the Finance Minister Arun Jaitley, there were many sections of the industry who were expecting a rate cut.

Debopam Chaudhuri, Chief Economist, ZyFin Research said, "A high rate environment would be instrumental in delaying any evaporation in hot money as USA recovers, a risk accentuated further by India's low rating as an investment destination. Rupee would benefit too. However, the opportunity-cost relationship between this and the adverse impact on economic activity due to high borrowing costs appears to be lopsided."

He added, "Interest rate sensitive sectors like Infrastructure and Auto may be the first ones to feel the heat, since usually during an economic recovery, these sectors are expected to be the frontrunners"

Since the fourth bi-monthly monetary policy statement of September 2014, the global economy has slowed, though the recent sharp fall in crude prices will have a net positive impact on global growth. The recovery in the United States is broadening on the back of stronger domestic consumption, rising investment and industrial activity. Notwithstanding the cessation of asset purchases by the US Fed, financial markets have remained generally buoyant on abundant liquidity stemming from accommodative monetary policies in the advanced economies

A rise in investment is critical for a sustained pick-up in overall economic activity. While low capacity utilisation in some sectors is a dampener, the recent strong improvement in business confidence and in investment intentions should help. In this context, the still slow pace of reviving stalled projects, despite government efforts, warrants policy priority, even as ongoing efforts to ease stress in the financial system unlock resources for financing the envisaged investment push.

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