RBI unlikely to cut policy rate

Mumbai: RBI headquarters on the day of RBI's monetary policy meeting in Mumbai on Tuesday. PTI Photo by Mitesh Bhuvad(PTI7_30_2013_000037A)  

While the Reserve Bank of India (RBI) is likely to maintain its policy rate at current levels, the financial markets expect that the central bank would reduce the Statutory Liquidity Ratio (SLR) further.

In the last bi-monthly policy review on August 5, amidst uncertainty over the progress of the monsoon, the RBI had kept the short term indicative lending rate (repo) at the current level of 8 per cent and the Cash Reserve Ratio (CRR) unchanged at 4 per cent. However, SLR was reduced from 22.5 per cent to 22 per cent with effect from August 9. In the June bi-monthly policy also, the central bank had cut SLR by 50 basis points from 23 per cent to 22.5 per cent.

“We do not expect any rate change, because despite slight decline in inflation, the January 2016 target of 6 per cent would be hard to achieve and the monetary policy will remain vigilant,” said D. K. Joshi, Chief Economist, Crisil, a leading rating agency. The RBI Governor, Raghuram Rajan, recently said that the “persisting inflation” was a major concern for the central bank.

“Moderate drop in consumer price index (CPI) and significant drop in wholesale price index (WPI) will not make much difference to RBI’s mind and they can be clearly expected to hold the policy rate on September 30 and wait for more data,” said Samir Lodha, Managing Director, QuantArt Market Solutions Pvt. Ltd, a foreign exchange and interest rate advisory firm.

Mr. Joshi said that the SLR could be cut as there was some relief on the fiscal front and the government borrowings were likely to be continued.

SLR is the portion of deposits banks are required to maintain in the form of gold or government securities, before providing credit to customers. CRR is the portion of total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank and the repo rate is the rate at which the central bank lends money to banks.

In the last policy review, Dr. Rajan said that “The idea behind the SLR cut is that if government finances are improving and the government is on a fiscal consolidation mode, we can afford to liberate more access to government financing and make it possible for the private sector and public sector firms to get access to that financing.”

Further, Mr. Joshi said that “Growth target at 5.5 per cent looks reasonable and the RBI is likely to stick to it.” The new initiatives of the government are likely to give the required impetus for the GDP growth.

However, Mr. Lodha said that there was a need to cut rate at the earliest. A high interest rate has placed Indian companies in a competitive disadvantage against their peers from developed world.

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Printable version | Nov 29, 2021 9:46:53 PM |

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