Reserve Bank of India (RBI) Cuts Interest Rates

The Reserve Bank of India (RBI) on Tuesday, 21 April 2009 cut its key short-term rates by 25 basis points each to shore up faltering growth in the face of the global economic slowdown. The Reserve Bank also repeated a call for banks to pass on its rate cuts to customers and said deposit rates should also fall. "There
is scope for the overall interest rate structure to move down within the policy rate easing already effected by the Reserve bank," it said, adding its latest rate cut reinforced the case. 

Reacting to the RBI rate cut, ICICI Bank, India's largest private sector bank by net profit, announced a reduction in both deposit and lending rates after trading hours on Tuesday, 21 April 2009. 

The RBI cut is growth estimate for the year ended March 2009 (FY 2009) to 6.5% to 6.7%, from 7% projected earlier. It has forecast growth of around 6% for the year ending March 2010 (FY 2010). The fiscal and monetary stimulus measures initiated during 2008-09 coupled with lower commodity prices could cushion the downturn in the growth momentum during 2009-10 by stabilizing domestic economic activity to some extent, RBI said in a statement. However, any upturn in the growth momentum is unlikely in view of the projected contraction in global demand during 2009, particularly decline in trade, it added. 

Strong rural demand, lagged impact of monetary and fiscal stimuli,softening of domestic input prices, investment demand from brown-field expansion projects and some restructuring initiatives are expected to have a positive impact on industrial production in the coming months, the RBI said. 

While moderation in internal accruals has an adverse effect on corporate investment, decline in input prices and reduction in borrowing costs may have a favourable impact on profitability of the corporate sector going forward, the RBI said. 

The central bank said that managing large government borrowing in FY 2010 in a non-disruptive manner would be a major challenge, and said it would used a mix of monetary and debt management tools to ensure this was done smoothly. Large borrowings also militate against the low interest rate environment that the RBI is trying to maintain to spur investment demand in keeping with the stance of monetary policy, the central bank said in its policy statement. 

The RBI said wholesale-priced based inflation was expected to turn negative early in the current fiscal year, but this should not be interpreted as deflation for policy purposes. It projected WPI inflation would be around 4% at the end of FY 2010. 

The RBI said a planned April 2009 review of the policy on foreign banks in India would now not go ahead until there was greater clarity regarding stability, recovery of the global financial system and better global coordination on regulation and supervision. 

ICICI Bank also cut rates for retail customers by 50 basis points. The rates on deposits have been cut between 25 to 50 basis points, with effect from Friday 24 April 2009, the bank said. 

India's second largest private sector bank by operating income HDFC Bank rose 0.68%. Its ADR gained 6.4% overnight. The banks' net profit rose 33.9% to Rs 630.88 crore on 53.1% rise in operating income to Rs 5,365,52 crore in Q4 March 2009 over Q4 March 2008. The results were more or less in line with market expectations. 

HDFC bank's gross non performing assets (NPA) stood at 1.98% of advances as of 31 March 2009 compared to 1.91% as of 31 December 2008. Net NPA as of 31 March 2009 was at 0.63% of net advances. 

India's biggest dedicated housing finance firm by operating income HDFC rose 0.73%.