Mumbai, July 29: Mixed views abound on whether RBI governor Duvvuri Subbarao will spring a pleasant surprise in the form of a rate cut during Tuesday’s first-quarter monetary policy review.
Many feel that the Reserve Bank will maintain a status quo on key monetary policy rates because there has been no significant moderation in inflation. However, a few believe that the RBI may bring down the cash reserve ratio (CRR) to address the economic slowdown, which is continuing to weigh on corporate performance. The optimists also believe that the apex bank’s guidance will be much less hawkish.
Subbarao has surprised the Street on the last two occasions. In April, the RBI stunned the markets by defying expectations and bringing down the repo rate by 50 basis points. This was followed by the mid-quarter policy review in June when none of the key rates were altered. The RBI was then widely expected to at least lower the repo rate by 25 basis points.
Repo rate is the rate at which the central bank provides funds to banks, while CRR is the portion of deposits that lenders have to maintain with the RBI.
“The slowdown in the economy is certainly a concern. In fact, we may also see the RBI revising downwards its GDP estimate of 7.3 per cent for the year. This apart, the core inflation number, which it tracks, has also ruled steady at around 5 per cent in recent times. These factors may lead to a rate cut from the RBI,” a senior official of a foreign bank said.
State Bank of India chairman Pratip Chaudhuri is among the few who expect a reduction in the CRR. He said there could be 50-basis-point cut in the cash reserve ratio because there was a pressure on liquidity. Chaudhuri pointed to the 9 per cent interest rate on certificate of deposits — a borrowing instrument of banks — as an indication of the tight liquidity condition.
“In the current circumstances, the best way out for the RBI to improve sentiment will be to reduce CRR,” he said.
However, there are many who believe that the RBI will hold on to the key rates in view of inflation, which is well above the apex bank’s comfort zone of 5 per cent.
Besides, the below normal monsoon has sparked concerns that inflation may inch up further.
Matthew Edmonds, economist at RICS, said it would be difficult for the RBI to bring down the repo rate any further in the near term with the rising wholesale and consumer prices. He maintains that there will be only one cut by the end of this year as the central bank tries to support growth in an unstable global economy.