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Inflation, fiscal deficit leave little room for rate cut

Source : IANS
Last Updated: Sun, Jul 29, 2012 10:44 hrs
A man walks past an RBI logo in front of its building in Kolkata

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.




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