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New Delhi: The
Reserve Bank of India (RBI) is unlikely to cut interest rates when
it reviews the monetary policy Tuesday as a ballooning fiscal
deficit, high inflation and global uncertainty remain big
concerns.
While some analysts are betting on a 25 basis points (0.25
percent) rate cuts, a majority feels the central bank was not in a
position to cut rates given the current macro-economic situation
and a deficient monsoon this year.
The RBI is scheduled to announce the first quarter review of the
monetary policy July 31. In the mid-quarter review announced last
month, the central bank had left key policy rates unchanged after
cutting the rates by 50 basis points in April.
"The fiscal condition is only worsening. Inflation continues to
remain high. In this situation, the maximum we can expect is a 25
basis points cut," said Sanjeev Krishan, executive director at
PricewaterhouseCoopers (PwC).
Krishan said even a small rate cut would help improve business
sentiment. "It won't have any big impact, but it can help improve
sentiments, especially in the stock market," Krishan told IANS.
Expressing similar hope, Anis Chakravarty, senior director of
Deloitte in India, said the RBI might cut rates by 25 basis
points.
"The RBI may try to balance. Inflation is a problem, but slowdown
in growth is also a big problem. I think there is a room for a 25
basis points cut," said Chakravarty.
The RBI has cut policy rates just once since the beginning of
2010. The central bank eased monetary policy and cut lending and
reverse lending rates by 50 basis points in April, after hiking it
13 times in two years.
Chakravarty said the RBI was in a tight position due to the
looming uncertainty over monsoon.
"Clarity will come by the end of the second quarter or in the
beginning of the third quarter (September-October). Before that I
don't expect any big move by the RBI," Chakravarty told IANS.
In its policy review meeting June 16, the RBI had kept key policy
rates unchanged. Currently the repo rate, the rate at which the
RBI lends to commercial banks, is eight percent while the reverse
repo rate, the rate at which the RBI borrows money from commercial
banks, is seven percent.
The Cash Reserve Ratio (CRR), the amount of funds that the
commercial banks have to keep with the RBI, stands at 4.75
percent.
These rates determine the lending and borrowing rates by
commercial banks to general public.
Siddharth Shankar, Director, KASSA group, a New Delhi-based
financial firm, said the RBI is likely to keep key policy rates
steady until the things on monsoon become clearer.
"I don't expect any change. Neither in CRR nor in repo or reverse
repo rates," Shankar said.
Shankar noted that combined borrowings by commercial banks from
the RBI currently was around Rs.60,000 crore per day, which
indicate that liquidity is normal in the system.
"If the daily borrowings go above 1 lakh crore, it indicates a
liquidity problem. Then the RBI should cut CRR, but I don't think
it is needed now," he said.
Shankar said lowering of rates would fuel inflation and might
further weaken the rupee. "At the ground level, inflation is
estimated at around 12 percent, so the real interest rate on bank
deposit is negative. If you reduce rates, people will put money in
gold and other commodities, which will further weaken the rupee,"
he said.
Core inflation declined to a five-month low of 7.25 percent in
June as compared to 7.55 percent in the previous month. But it
remains much above the RBI's comfort level of 4-5 percent.
The real worry is on food inflation, which remains in
double-digit. Food inflation accelerated to 10.81 percent in June
as compared to 10.74 percent in the previous month, according to
the latest available data.
Chakravarty said inflation would remain "sticky" till the third
quarter of the current financial year and June data might be
revised upward.
As per the data released by the Central Statistics Organisation
last week, India's industrial output grew by 2.4 percent in May.
At the same time growth remains under pressure. Industrial output
has grown by 0.8 percent in April-May period.
The country's gross domestic product expanded by 5.3 percent in
the quarter ended March, the weakest in nine years.
(Gyanendra Kumar Keshri can be contacted at gyanendra.k@ians.in)
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