The Reserve Bank of India (RBI) will walk a tightrope when it is
expected to enhance liquidity in the sluggish economy by cutting Cash Reserve Ratio (CRR) by 50 basis points and
repo rate by 25 basis points in the upcoming annual credit policy, which will be announced on Tuesday.
CRR is the percentage of deposits banks need to park with RBI and repo rate is the rate at which banks borrow from the apex bank. Hundred basis points is one per cent.
Currently, the repo rate stands at 8.5 per cent and CRR at 4.75 per cent. Last month,
RBI slashed CRR from 5.5 per cent to 4.75 per cent thus infusing Rs 48,000 crore into the system.
MUST READ: Want a home loan? Learn about your credit score first Chief executives of banks, economists and industry captains have
urged RBI to go for a 0.25 per cent cut in repo rate and 0.75 per cent cut in CRR to boost the economy. All are concerned about the current slow growth in industrial production, and it is believed that a rate cut would boost investments and enhance factory output.
Industrial output growth has slowed to 4.1 per cent in February.
The current high interest rates regime has impacted investments and the GDP growth rate had fallen to a low of 6.9 per cent, the worst since 2008-09. The only consolation is that India's economy is much stronger than most western economies which are reeling under recession.
MUST READ: Deposit growth of banks slows down State Bank of India (SBI) Chairman Pratip Chaudhuri, on the sidelines of a recent conference, said RBI should cut CRR by 0.75 basis points.
"We expect a minimum 25 basis point cut in the repo rate.
RBI may even surprise by cutting the rates by 50 basis points. The recent correction in global oil prices may allow RBI to take a dovish stance. We expect RBI to pre-empt the much-awaited pass-through of petrol price hike by the government," Shyam Srinivasan, managing director (MD) & chief executive officer (CEO), Federal Bank told MAIL TODAY.
"In the medium term, we expect RBI to continue with the interest rate cut cycle and cut the Repo rate by about 100 basis points over the financial year," Srinivasan added.
MUST READ: How to reduce your home loan burden P. R. Somasundaram, MD & CEO, Lakshmi Vilas Bank, said, "The tight policy objectives seem to have had their effect; inflation has moderated. Perhaps, it is time to target growth objectives through a combination of rate cuts and improved liquidity, ideally more aggressive than market expectations. U NDER the current circumstances, where growth in capital spending has also suffered... a further cut in CRR and a repo rate cut of 50-75 basis points seems timely."
Bankers in general say that they believe a rate cut is imperative to
address the problem of slowdown and tight liquidity condition. RBI on its part is concerned about the current account deficit gap due to sudden depletion of foreign exchange reserves.
The challenge before RBI is to spur growth as it will ensure capital flows. Further tightening could be counterproductive and at the same time, RBI does not want the economy go the western world way.
The
rising fiscal deficit of 5.9 per cent, current account deficit of 3.6 per cent and short-term debt (23.3 per cent of the GDP) levels are matter of concern and could lead to a payment crisis.
RBI is bent upon avoiding it.
Analysts say that they believe the rate cut may revive the economy but high commodity rates and prices of international crude oil as well as inflationary pressures could spoil the genuine objectives.
Courtesy: Mail Today 
RBI Governor D Subbarao 
Special 
