Bankers have requested the central bank to cut the repo rate by 50 basis points and the cash reserve ratio by 25 bps in the third quarter review of monetary policy scheduled on January 29.
They did so at a meeting between Reserve Bank of India (RBI) seniors and heads of banks in a pre-review consultation. All the RBI deputy governors were present.
RBI has not reduced the repo, at which it lends to banks, since April as inflation has stayed high. Market participants hope for at least a 25 bps cut, if not 50 bps. In less than a month, yields on the 10-year benchmark government bond have softened by 25-30 bps in anticipation.
The fall in wholesale price index inflation for December to 7.18 per cent from 7.24 per cent in November also gave hope for a cut.
RBI officials were keen to know if banks would cut their lending rates if the repo was brought down but bankers said only a meaningful cut in the latter would impel them to reduce the former.
Some of the bankers expressed concern over the country’s high current account deficit (CAD), a possible hindrance for softer rates. The CAD for July-September widened to a record 5.4 per cent of GDP from 4.2 per cent during the same period last year and 3.9 per cent from the April-June quarter. The rise in the CAD to $22.3 billion from $16.4 bn was mainly due to a widening trade deficit and a slowing in remittances from Indians abroad.
Bankers also requested the central bank for more time to adhere to the high provisioning norms on standard restructured advances. During the half-yearly review of monetary policy, RBI asked banks to increase this provisioning from the existing two per cent to 2.75 per cent. An RBI committee, headed by B Mahapatra, had recommended abolition of the regulatory leeway given to banks for debt recast and suggested banks must classify a loan as a non-performing asset if restructured. At present, loans can remain classified as standard even if restructured, though the provisioning requirement increases.