Pressure mounting on RBI to cut rates, say experts

Pressure mounting on RBI to cut rates, say experts

Pressure mounting on RBI to cut rates, say experts

Pressure is mounting on the Reserve Bank of India (RBI), both by industry and banks, to cut policy interest rate as well as cash reserve ratio on Monday to boost sagging industrial growth.

The clamouring for a cut in interest rate and cash reserve ratio (CRR) has increased in view of declining inflation and the need to arrest fall in industrial production.

However, experts say the declining value of rupee may constrain RBI to take bold measures in its mid-quarter monetary policy review scheduled on June 17.

SBI chairman Pratip Chaudhuri made a case for a cut in CRR — the amount of deposits which banks are required to keep with RBI in cash — saying it would give more leeway to banks to provide cheaper credit to borrowers.

“A 25 basis points (0.25 per cent) cut in repo rate will give an additional income of Rs 50 crore. How do I distribute it? (SBI has a loan book of Rs 7 lakh crore). If you reduce the CRR by 25 bps, I get about Rs 3,000 crore. If there is a CRR cut, then the transmission is more pronounced,” he said.

Industry body Assocham said most of the risk factors flagged by RBI in its annual monetary policy have significantly receded “leaving a lot more headroom for the central bank to go in for further cut in the key policy interest rates”.

In its annual monetary policy on May 3, RBI had slashed repo rate (short-term lending rate) by 0.25 per cent, but had kept the CRR unchanged at 4 per cent. Industry has been complaining that high interest regime is hurting economic activities. The factory output (IIP) slowed to 2.3 per cent in April from 3.4 per cent in March.

MD & CEO of Icra, Naresh Takkar, however, opined that while the healthy onset of the monsoon has reinforced expectations of easing in food inflation over the near term, the recent rupee depreciation may act as a dampener.

“We expect the RBI to refrain from further easing in the June policy review, despite the weakness in industrial growth,” he said.