RBI is expected to cut its policy rate on Tuesday to prop up economic activity and boost investment as inflation remains low and fiscal deficit has been contained.
Deflationary pressure persisted for the sixth month in a row as fall in prices of fuel and manufactured items pulled the wholsale inflation to a new low of (-)2.65 per cent in April. Besides, retail inflation has also been falling.
Industry and bankers are hopeful of a rate cut as the government has also been able to rein in fiscal deficit within 4 per cent of GDP in 2014-15 providing room for easing of monetary policy.
“There is a possibility of recalibration of (policy) rate as inflation is in the negative territory,” said Indian Banks’ Association Chairman T M Bhasin.
Echoing similar views, United Bank of India MD and CEO P Srinivas said: “I expect a 0.25 per cent rate cut as retail inflation is better now. If they do not cut rate now, it will be very difficult for them later once El nino effect comes in. There is a need for a rate cut to boost growth.”
Bhasin said as far as bankers are concerned, the preferable mode is passing on the reduction of CRR cut, which gives us leeway in reducing rate of interest on advances.
“We have surplus liquidity in the system as there has not been much credit offtake so repo window does not give banks any advantage as we don’t borrow from banks at this point. So, the CRR window helps us bring down cost of funds. We expect and will request 0.5 per cent cut in CRR which would release about Rs 40,000 crore in the system,” Bhasin added.
Encouraged by macroeconomic parameters, industry chambers are also pitching for cut in interest rate. Industry bodies including Ficci and Assocham have put forth the demand for cut in the interest rate.
In the last bi-monthly monetary policy released on April 7, RBI Governor Raghuram Rajan had left policy rate or repo rate unchanged. However, the central bank had lowered its policy rate twice in January and March by 0.25 per cent each.
The repo rate, at which the RBI lends to the banking system, currently stands at 7.5 per cent and the cash reserve ratio, which is the amount of deposits parked with the central bank, is 4 per cent.
Bank of India Chairperson and Managing Director V R Iyer said: “Of course the macro parameters are fairly good but due to inflationary expectations do not look very encouraging so that may deter RBI to do anything beyond 25 basis points.”