RBI review on Dec 18: Further CRR cut in the offing?

When the Reserve Bank of India (RBI) meets on Tuesday, December 18, for its mid-quarter policy review, there will be expectations of a pause or a 25-basis-point cut in the cash reserve ratio (CRR).

While this would bring more liquidity into the system, no one is betting that Governor Duvvuri Subbarao will announce a rate cut or a repo rate cut despite falling inflation numbers.

The CRR today stands at 4.25 per cent.

It is widely believed that the RBI will announce a cut in rates, especially the repo rate, by 50 basis points, at its January 29, 2013, meeting. The repo rate is the rate at which it lends money to commercial banks. It was last reduced in April, by 50 basis points, to eight per cent.

In October, the RBI kept the policy rate unchanged at 8 per cent but slashed the CRR by 25 basis points to infuse more liquidity into the banking system.

There are some who say a CRR cut is unlikely this time around given the aggressive open market operations by the RBI in the recent past, buying back securities from banks and releasing funds into the system.

But there is a case for infusion of more liquidity into the system.

The IPO market is showing some signs of traction with the Bharti Infratel initial public offering mobilising $830 million this month. There are also disinvestment programmes lined up where the government is expected to raise anywhere between $5 billion to $6 billion from the market.

The government's disinvestment of a 10 per cent stake in state-owned NMDC has already sailed through, garnering over a billion dollars.

The government should present its Budget in February next year, offering greater clarity on its fiscal consolidation measures. Already, the fiscal deficit is expected to widen to 5.6 per cent.

Finance minister P. Chidambaram has revised the fiscal deficit target upwards to 5.3 per cent from the 5.1 per cent specified in the 2012/13 Union Budget.

In 2011/12, the fiscal deficit missed its target of 4.6 per cent by some distance, ending the year at 5.9 per cent. With Lok Sabha elections around the corner in 2014 and expectations of an election budget in 2013, the RBI has little room to reduce the policy rates drastically.

Apart from fiscal deficit concerns, a lot will depend on the inflation numbers in coming months .

The RBI has actually projected higher inflation for 2012/13, revising its projections upwards from 7.3 per cent to 7.7 per cent. Recently, there has been some good news on the inflation front. After rising steadily for a few months, it has shown a downward trend, falling to 7.2 per cent year on year in November against 7.5 per cent in October.

But it is too early to celebrate on the inflation front - the RBI's comfort level is 4-5 per cent.

The central bank has also lowered its gross domestic product (GDP) growth projection for financial year 2012/13 drastically from 6.5 per cent to 5.7 per cent.

Given all this, most analysts do not expect more than a reduction in the CRR on Tuesday.