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Investors cheer RBI's rate cuts

Bullish sentiment swept India's debt market on Wednesday, one day after the Reserve Bank of India cut its leading interest rate to a 29-year low and eased other rates in an effort to offset the economic impact of a widespread drought.

On Tuesday, the RBI reduced its benchmark bank rate to 6.25 per cent from 6.5 per cent and cut its repurchase rate -- the rate at which it borrows from the market -- by a quarter point to 5.5 per cent, and lowered banks' reserve requirements to 4.75 per cent from five per cent.

The slew of easing measures aimed at buttressing a faltering economy pushed the benchmark 10-year bond, the 7.40 per cent 2012, to a new low of 6.94 per cent, in morning trade.

"Sentiment is still very bullish as the policy exceeded expectations," said a primary dealer.

Financial dailies called the easing a surprise Diwali gift as few analysts had expected the RBI to cut all three key rates.

"Faced with the inevitability of a slowing economy, the Reserve Bank of India has come out with all guns blazing," the Economic Times said in an editorial.

But it warned the celebrations could be short-lived.

"What is likely to linger is the sense of despondency occasioned by the sharp reduction in the bank's assessment of GDP growth," it said, adding it was unrealistic to expect the policy measures to result in "any dramatic turnaround in the economy".

The bank cut its 2002-03 growth forecast to 5.0 to 5.5 per cent from an earlier forecast of 6.0-6.5 per cent, estimating farm output would fall 1.5 per cent as the worst drought in 15 years hit demand in a nation where 70 per cent of its more than one billion people live off the land.

Farm output grew 5.7 per cent in the year to March 2002 while the overall economy expanded by 5.4 per cent.

The key Bombay share index rose nearly half a per cent propelled by blue-chip gains. Traders said it would take time for the monetary easing to filter through to the market.

The key business lobby, the Confederation of Indian Industry, said it was "satisfied with most aspects of the credit policy".

But the head of the industry group, Ashok Soota, said in a statement it was now up to commercial banks to pass on the rate cuts.

High depositor interest rates "militate against any appreciable fall in lending rates in the short-term," he said.

"More reforms are needed in banking before we see real interest rates competitive with the rest of the world," he said.

A senior manager at leading Indian cement maker expressed similar concerns.

It's to be seen how much of the cuts will be onpassed as banks' intermediation costs have not fallen much and most state-run banks continue to have a high cost of funds," said R Govindan, deputy general manager finance at Larsen & Toubro.

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