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Repo cut: India Inc sceptical

October 21, 2008 09:57 IST

India Inc, while welcoming the Reserve Bank of India's move to cut the key interest rate, expressed doubts on lenders' response to pass on the benefits to customers.

"We should see the effect of the rate cut in the next one-two months depending on the steps taken by banks and financial institutions," said Ravi Sud, CFO, Hero Honda Motors.

"We do not see any immediate impact of the cut so far as the two-wheeler industry in concerned,'' he added.

The apex bank on Monday cut its repurchase rate, or the rate at which it lends to the banks, by 100 basis points to 8 per cent in a bid to boost sentiment and soften interest rates.

"The repo rate cut clearly signals that the banks should lend more. We have to wait and watch to see what steps will banks take,'' said Sanjiv Bajaj, ED, Bajaj Auto.

"We are hoping that our consumer finance business should do better,'' he added.

Industry executives expressed scepticism on immediate relief because the banking system is facing liquidity crunch forcing lenders to push rates higher. To worsen the situation, an anticipated downturn in economic growth exacerbated the cautiousness. 

"The problem is that liquidity is not being sustained in the market. The RBI is infusing liquidity by sucking out rupees. Given the parody, it's not clear if this would improve liquidity,'' said George Issac, CFO, GVK Group.

In normal circumstances, the central bank measures, including a cut in the cash reserve ratio and followed by a repo rate cut, would have boosted liquidity and reduced interest rates immediately, but RBI is tackling several variables including controlling inflation, infusing liquidity and ensuring the rupee doesn't depreciate further, which works at cross purposes.

Some banks, taking advantage of the tight liquidity, were lending money at 15-18 per cent, Issac said.

BS Reporter in New Delhi and Mumbai
Source: source