RBI likely to cut policy rates by 0.25 percent

RBI likely to cut policy rates by 0.25 percent

The Reserve Bank of India (RBI) is likely to cut key rates by 0.25 percent when it reviews the monetary policy Tuesday, in order to revive sluggish growth even as inflationary pressure continued, experts said.

The central bank is scheduled to announce mid-quarter review of monetary policy Tuesday.  “We expect a 25 basis points cut in the repo rate by the RBI in the forthcoming policy review, but rate cuts going forward are likely to be limited by still-prevalent upside risks to inflation and the widening current account deficit,” Bhupali Gursale, an economist at Angel Broking, said.

In the previous review announced Jan 29 this year, the RBI had lowered all the key policy rates by 0.25 percent.  The repurchase rate, or the interest on short-term borrowings by commercial banks, was cut by 25 basis points to 7.75 percent and the reverse repurchase rate, or interest on short-term lending, was lowered by 25 basis points to 6.75 percent.

In third quarterly review of the monetary policy announced Jan 29, the central bank had also cut the cash reserve ratio, or the money commercial banks have to retain in the form of liquid assets in proportion to their deposits, by 0.25 percent to 4 percent.

Analysts said the RBI was likely to cut repo and reverse repo rate by at least 0.25 percent in March 19 review as economic growth remained sluggish.  Easing in manufacturing and core inflation should also give the RBI some room to cut interest rates.

According to the latest government data wholesale price based inflation rose to 6.84 percent in February as compared to 6.62 percent in the previous month and retail inflation accelerated to 10.91 percent.

“Manufacturing sector inflation dropped to 4.51 percent in February 2013 as compared to 4.81 percent in the previous month. This gives room to the Reserve Bank of India to bring down interest rates and complement the intention of the Union Budget to enhance investments,” said Naina Lal Kidwai, president of the Federation of Indian Chambers of Commerce and Industry (FICCI).

“This will help uplift sentiments of India Inc. The green shoots are certainly on the horizon and a concerted push in investment can help bring India back on the growth trajectory,” Kidwai said.

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