Experts expect status quo on repo rate,but many see CRR cut

Reserve Bank is unlikely to go for any change in the repo rate

Written by ENS Economic Bureau | Mumbai | Published: January 23, 2012 12:46:54 am

Notwithstanding the demand to cut rates from India Inc and others,the Reserve Bank is unlikely to go for any change in the repo rate as inflation of manufactured goods is still high.

Bankers have virtually ruled out any cut in repo rate,while some of them expect a reduction in the cash reserve ratio (CRR) in the RBI’s policy review on January 24. “I don’t see moderation in the interest rate (in the coming policy). On CRR cut,I’m not hopeful,” SBI chairman Pratip Chaudhuri said. “I think there would be strong measures to indicate that the RBI wants inflation to be stamped out totally.”

Upasna Bhardwaj,Economist,ING Vysya Bank,said,“Given that systemic liquidity has remained far above the RBI’s comfort zone of -1 per cent of NDTL since January,we expect the RBI to announce measures to inject liquidity through a 50 basis points CRR cut,releasing about Rs 30,000 crore in the system. Coupled with this,the RBI will need to continue with 2-3 more OMO (Open Market Operations) purchases to bring back liquidity within its targeted levels.”

Bhardwaj said repo rate is likely to be kept unchanged at 8.5 per cent in the forthcoming RBI meeting. “The RBI is likely to acknowledge the slowdown in growth and revise down its projection for real GDP growth in 2011-12 to near 7 per cent as against its earlier estimate of 7.6 per cent YoY.”

Nomura said the RBI is expected to keep the repo rate unchanged despite slowing growth and falling inflation (below 8 per cent in December),as core inflation remains high at 7.7 per cent YoY in December . “Liquidity is a bigger concern as liquidity deficit in the banking system widened to 2.5 times the RBI’s stated comfort zone,which increases pressure for a CRR cut.”

“In our view,a CRR cut is warranted; OMOs would likely prove insufficient in reducing the liquidity deficit in the light of an increase in outflows of ‘currency with public’ and the recent forex intervention (selling USD) by the RBI. We estimate a 50 bps cut in the CRR would inject Rs 30,000 crore of liquidity without a significant inflationary impact,” Nomura said.

However,according to the RBI Deputy Governor,CRR and statutory liquidity ratio (SLR) “straddle the divide between liquidity and monetary management,which,at the current juncture,we (the RBI) are intent on maintaining”.

Sanjeev Kumar,Financial Planning (Head),JRG Securities,“High interest rate is denting the GDP growth. Government borrowing programmes like NHAI bond issue are sucking away the liquidity. As you may remember,the RBI started increasing the interest rate to curb inflation. Inflation is still high. It’s highly probable that the RBI will not make any change in the current rates now.”

Providing some relief to policymakers has been the recent positive data prints (PMI manufacturing and services and industrial production) suggesting that the economic growth is holding up pace. Also,the sharp decline in the headline inflation figures,from 9.11 per cent YoY to 7.47 per cent YoY in December,has provided some breathing space for the central bank.

Additionally,the inflation trajectory remains uncertain going forward given that food prices are likely to reverse their declining trend. Oil prices also continue to pose a risk. However,the base effect should continue to bring headline inflation towards RBI’s target of 7 per cent.

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