Rate cuts unlikely as RBI reviews policy this week
India Inc's hopes of a rate cut may not happen, atleast this time, even though inflation, the main worry of the Reserve Bank of India (RBI), has shown a significant decline.
The RBI will conduct the third quarter review of the monetary policy on Tuesday.
As per latest data, India's annual food inflation continued to be in the negative for the third straight week. It was recorded at -0.42 percent for the week ended Jan 7 as compared to -2.9 percent and -3.36 percent consecutively in the previous two weeks. Overall inflation, based on the wholesale price index (WPI), too was down to a two-year low of 7.47 percent in December, 2011.
These numbers have come as a relief to policymakers who have been trying combat high inflation mainly through 13 interest rate hikes since early 2010. But bankers don't think the RBI will lower key interest rates just yet. "I don't see moderation in the interest rate. I am not hopeful of a CRR (cash reserve ratio) cut," said SBI chairman Pratip Chaudhuri.
The cash reserve ratio defines the amount banks must deposit with the central bank. The ratio is tweaked to manage the liquidity in the market. "I think there would be strong measures to indicate that RBI wants inflation to be stamped out totally," added Chaudhuri.
In its last review in December, the RBI had decided to pause its monetary tightening measures and said it might look at easing rates in the future depending on moderation in inflation.
"From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth," the RBI Governor Subbarao had said in the last review. The central bank, however, would not want to hold off any lowering in interest rate as it would not want to impede industrial growth. Cumulative factory output in the April-November period has been sluggish at 3.8 percent as against a growth of 8.4 percent in the like period of 2010.
