Mumbai, Dec. 14: A 10-month low inflation may not be enticing enough for the Reserve Bank of India to cut the repo rate in its monetary policy review next week.
Economists feel inflation is still above the RBI’s comfort zone to embolden it to cut the repo rates. The repo rate is that at which the RBI provides funds to banks and it now stands at 8 per cent.
However, the monetary policy could see the apex bank bringing down the cash reserve ratio (CRR) by 25 basis points, a move that is expected to release around Rs 17,000 crore into the banking system. The CRR is the portion of bank deposit that must be maintained with the central bank. It is now at 4.25 per cent.
With inflation expected to ease further in the coming months because of lower core inflation (non-food manufactured products) and a favourable base effect, there is some hope among players in the capital market that the central bank may in a pro-active measure bring down the repo rate next Tuesday.
The Reserve Bank has often emphasised that a sustained fall in inflation is key to it bringing down interest rates.
Reflecting this expectation, the Sensex bounced back from two-week lows today to close at 19317.25, a rise of 87.99 points, or 0.46 per cent.
Economists, however, feel that RBI governor Duvvuri Subbarao will not cut the repo rate in a hurry.
“Headline inflation at 7.24 per cent is way above the RBI’s comfort zone and I don’t expect any rate cut on December 18,’’ Rupa Rege Nitsure, chief economist at Bank of Baroda (BoB), said.
However, she said a fall in manufacturing inflation had led to a softening in the pricing power of firms on the back of a slowdown.
Bhupali Gursale, economist at Angel Broking, holds views similar to Nitsure. She said headline inflation still remained above the 5 per cent comfort zone and retail inflation was elevated.
“Therefore, we continue to believe that the RBI is unlikely to move its policy rate in the December policy review.’’ However, there could be a quarter of a percentage point cut in the CRR as advance tax outflows and seasonal demand are likely to keep the liquidity situation tight, Gursale added.