sns & pti
MUMBAI/KOLKATA, 16 JUNE: Pressure is mounting on the Reserve Bank of India, both from the industry and banks, to cut policy interest rate as well as cash reserve ratio tomorrow to boost sagging industrial growth.
The clamour for a cut in interest rate and cash reserve ratio has increased in view of declining inflation and the need to arrest fall in industrial production.
Experts, however, say the declining value of the rupee may constraint the RBI to take bold measures in its mid-quarter monetary policy review scheduled on 17 June.
SBI chairman Pratip Chaudhuri made a case for a cut in cash reserve ratio ~ the amount of deposits which banks are required to keep with the RBI in cash ~ saying it would give more leeway to banks to provide cheaper credit to borrowers.
“A 25-basis-point (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 the 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 3 May, the RBI had slashed repo rate (short-term lending rate) by 0.25 per cent, but had kept the CRR unchanged at four per cent.
Inflation, a main worry of the central bank, fell to a 43-month low of 4.7 per cent in May.
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.
Meanwhile, Icra expects the RBI to refrain from further easing in the June policy review, despite the weakness in industrial growth.
Mr Naresh Takkar, managing director and CEO of Icra Ltd, said: "While the healthy onset of the monsoon has reinforced expectations of easing food inflation over the near term, the recent rupee depreciation has clouded the outlook for inflation."
"Substantial gold imports would weigh upon the current account deficit in the first quarter of FY’14, the financing of which is a concern in light of the bouts of FII outflows in the ongoing quarter," he said.
Accordingly, we expect the RBI to refrain from further easing in the June policy review, despite the weakness in industrial growth, he added.
While the rupee has started to appreciate from lifetime low of 58.98 hit earlier this week, other experts too said that the weakening trend in the rupee may keep the RBI on wait-and-watch mode tomorrow. “…we cannot rule out the possibility that the RBI may decide to delay the rate cut in light of the recent INR weakness. Following this policy rate cut, the room for additional monetary policy easing is limited and we only expect one more rate cut of 25 bps,” Leif Eskesen, chief economist for India & Asean at HSBC, had said. During fiscal 2011-12, the RBI had increased repo rate 13 times with an aim to tame inflation, but has reduced the rate by 1.25 per cent since January 2012.