Bankers expect Reserve Bank of India to hold rates in monetary policy review

While Union Finance Minister Arun Jaitley and India are keen on the Reserve Bank of India (RBI) cutting key interest rates to rev up the economy, bankers expect RBI governor Raghuram Rajan to stick to the existing rates during the credit policy review on Tuesday.

There is a strong case for a rate cut as the GDP growth rate has fallen to 5.3 per cent in the second quarter from 5.7 per cent in the first quarter and inflation has declined to a five-year low.

State Bank of India Chairperson Arundhati Bhattacharya does expect RBI to cut interest rates on Tuesday and the soft money policy is likely to kick in only by the end of this current fiscal.

"The fact of the matter is that all the parameters are indicating that there will be a further fall in inflation. Between November and January with the base effect it might go up a little bit. But by March, it will be well below whatever the glide path that is indicated by RBI," she said.

Asked if she expects a rate cut in RBI's bi-monthly policy on December 2, she said, "No".

United Bank of India Executive Director Deepak Narang said that RBI would wait for some more time before effecting a rate cut to prop up growth.

"Although parameters are conducive for rate cut, there is hardly any appetite for loan in the market. Rate reduction by 0.25 per cent is not going to generate significant demand in the market."

However, Yes Bank Chief Executive Officer and Managing Director Rana Kapoor is more optimistic and expects 0.25-per cent rate cut.

"RBI would indeed draw comfort from the recent pace of disinflation, and in my opinion announce a maiden cut of 25 basis point in the December 2014 policy review," he said.

The repo rate, at which RBI extends short-term loans to banks, is eight per cent while the reverse repo rate is seven per cent.

The cash reserve ratio for banks has been fixed at four per cent.

Analysts feel that rates will not be changed but RBI could effect rate cut towards the end of this fiscal.

Morgan Stanley in a report said, "We believe that RBI is likely to keep policy rates on hold on December 2. We assign a very low probability to a rate cut in that meeting."

Domestic rating agency Care Ratings too concurred saying Rajan will go for a status quo on rates even though inflation is trending down.

The Associated Chambers of Commerce and Industry of India (Assocham) said that given the subdued economic growth, India Inc is expecting RBI to cut the benchmark interest rate by, at least, 50 basis point.

"The industry expectations for a rate cut are not unrealistic and based on more than expected decline in retail inflation, which is currently hovering at 5.52 per cent (for October), it added.