The business community has largely welcomed the central banks decision to cut policy rate by 100 basis points last week. The decision was in line with the broader market consensus too where - according to a BR Research poll - all those who were polled were expecting a rate cut and most were expecting a 100 bps cut.
A BR Genie tells us that one of the members of the central banks monetary policy committee (MPC) was in fact proposing a 200 bps slide. And come to think of it, even that proposal has effectively been met with the central bank setting the target rate at 6.5 percent, i.e. a cut of 150 bps as against his proposal of 200 bps. Reportedly, the SBP had already been experimenting with target rate in the recent past by lending at 7.5 percent to the banks when in fact the policy rate was set at 8 percent.
Sources on Chundrigar road say that the reason why a 200 bps was being proposed by one of the MPC members is that in his opinion there is need to give credit to the real sector which is literally "credit starved" right now.
That seems to be an exaggeration considering that the real sector isn demanding as much credit in any case, since most big boys in major industries had already in the recent past, or are already undergoing expansion. With major industries in the real sector working under capacity there are no major expansion plans to finance, whereas the banks are happy off lending to the government.
In the third quarter alone, there was a net retirement of Rs22.5 billion. Keeping in mind that the Jan-Mar quarter is hardly ever the worst period for private sector credit, it is important to note the net retirement of Rs22.5 billion in third quarter (3Q) FY15 was the highest in the last two 3Qs and third biggest in the last eight years. This seems rather strange as the discount rate in 3QFY15 average 8-8.5 percent, whereas in 3QFY12 and 3QFY09 discount rate had averaged 12 percent and 15 percent respectively.
Anyway, the argument of those advocating a 200 bps so goes that while it is true that big boys aren any need of fresh loans for expansion, it is the SMEs and smaller players in the relatively informal markets - the moms and pops businesses - that are in need of credit. And that, they add, these smaller players are much more sensitive to interest rates, and hence the need to bring down interest rates to 6 percent. This column would like you to ponder on this and let us know of our views.