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Price pinch for cash controller

Mumbai/New Delhi, April 28: Between the optimists who pine for a cut in interest rates and Bimal Jalan’s endgame, lies inflation — the only fly in the cheap-money ointment.

Even if the Reserve Bank (RBI) governor dishes out the fare the cash-hungry industry expects him to, there is no saying it will send borrowers queuing up at banks.

The soft monetary bias will fail to spur credit as demand remains weak despite the excess liquidity within the system, say analysts and economists. They contend that a low-rate regime isn’t justified by the current macro-economic fundamentals — strong export growth, swelling forex kitty and rising inflation.

Last month, the RBI had cut the repo rate — the rate at which the central bank borrows from other banks — by half a percentage point to 5 per cent as part of design to herald a lower interest rate regime. The reduction on March 3, after the budget, was the third in 2002-03.

“There is no need for a cut in the repo or cash reserve ratio (CRR) rate as the market has surplus liquidity,” reasoned Ajit Ranade, chief economist of ABN Amro Bank. “But I am expecting a 25 basis points cut in the bank rate as there is still some scope for a cut there.” The bank rate, a benchmark used more as a signalling device, is now at 6.25 per cent, a 30-year low.

In its October-March credit policy, the RBI slashed the bank rate by 25 basis points to 6.25 per cent and the repo rate to 5.5 per cent. Jalan had said the extra cash would enable the market to absorb extra government borrowings. But a senior consultant with a global financial firm said lower rates would not give banks a direct benefit. “Any cut would look awkward when it has been proved that lower rates do not push demand,” he said.

The rise in inflation to a two-year high at 6.47 per cent has sparked concerns that the build-up in price pressures will keep the RBI from cutting CRR by a widely expected 25 basis points in Tuesday’s monetary policy.

“It has to be seen whether governor Jalan will give priority to growth through a reduction in Bank Rate and the CRR or desist from slashing the CRR so that the inflation does not go out of control,” an analyst said.

Hongkong Shanghai Banking Corporation (HSBC) expects a 25-50 basis point cut due to a stuttering global economy, affected by an economic slowdown in the major industrial countries, the SARS epidemic and the Gulf War. “We can afford to take some aggressive risks on the monetary side and provide a boost to the economy,” said Tarun Mahrotri, the bank’s treasury head.

Asked on the increase in inflation to a two-year high of 6.47 per cent, Mahrotri said: “It is a short term phenomenon due to higher fuel prices and should not be cause of an immediate concern. It is bound to come down.”

“One should not be too worried about inflation as its rise is largely due to higher oil prices, which are softening. In my view, the RBI will bring down the bank rate and CRR by 25 basis points,” says Sanjit Singh of ICICI Securities. Jalan, he reckons, would rather ensure interest rates soften (banks cut their lending rates) after the reduction in the benchmark rate.

Gilts sparkle

Hopes that the bank rate would be cut sent the yields on the benchmark 10-year 9.81 per cent bond one basis point lower at 5.88 per cent. It had risen earlier in the day after data showed inflation spiralling to a new peak.

On bourses, bank stocks perked up. Bank of Baroda gained Rs 5.45 to close at Rs 86.35, Corporation Bank strengthened by Rs 5.85 at Rs 146.05 and SBI jumped Rs 3.40 at Rs 282.95.

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