RBI: Bankers see 50 bps CRR cut

While GDP growth hit a nine-year low last fiscal at 6.5 per cent last fiscal,inflation remains high at 7.25 per cent for June.

RBI left policy rates and CRR unchanged at the last meeting on June 16,arguing that there is tangible evidence that higher interest rates have led to growth slowdown.

Among the bankers who have gone public with CRR cut demand is the State Bank of India chairman Pratip Chaudhuri,who expects a 0.5 per cent reduction. The CRR currently stands at 4.75 per cent.

Chaudhuri also says he does not see a reduction in the repo rate from the current 8 per cent.

Chairmen of Central Bank and Union Bank,M V Tanksale and D Sarkar respectively,also hold similar view.

“We expect a 50 bps reduction in CRR to ease money supply. Also a CRR cut will have a cooling effect on the interest rates for customers apart from better effect on

monetary transmission than a repo cut,” Chaudhuri said,pointing out that last time there was no CRR cut and so there is a strong case for this time.

Explaining the rationale,Chaudhuri said this will help banks’ liquidity,which in turn will help them lower the lending rates,thus helping the monetary transmission better. On the contrary,a marginal reduction in the repo will not

help banks to cut lending rates.

“Interest rate is a necessary but not a sufficient criteria for growth. The rate cut will however bring some enthusiasm and improve the sentiment,” Chaudhuri said,adding that though issues such as land acquisition and environment clearances are impacting growth,a cut in interest rates will improve sentiments.

Chaudhuri also argued that the current rates are not within the comfort zone,and the real measure of liquidity perceived by the markets is not the liquidity adjustment facility,but the rates on certificates of deposits.

Stating that domestic interest rates are among the highest in the world,the SBI chief said it hurts the competitiveness of our companies. “The rupee loan for domestic corporates is around 11 per cent while that for a Chinese equipment manufacturer is only 4 per cent. So our companies face competition on the interest rate front itself.”

Central Bank’s Tanksale said he expects a 50 bps reduction in the CRR rate as cutting repo will give out a wrong signal on the inflation front.

But Yes Bank managing director Rana Kapoor said the rationale for a CRR cut has vanished with the liquidity situation getting back to the near normal. “As for a repo cut,I think the chances of it happening are less as inflation has taken a pole position in RBI’s thinking again.”

Similarly,HSBC India chief economist Leif Eskesen is also of the view that there is no reason for the Governor to slash rates now,as nothing on the fiscal or inflation fronts has changed from the mid-quarter review last month.

“With below-normal monsoons and little policy action from Delhi,the Reserve Bank is likely to keep rates unchanged next week. The fiscal stance remains too loose for comfort and elevated inflation expectations are a concern,” Eskesen said.

He also noted that despite challenging global economic backdrops,the domestic conditions have remained fairly stable,and so has inflation.

Echoing the Governor’s view that slowing core inflation cannot be taken as signal of the battle being won,Eskesen said though June WPI inflation eased to 7.25 per cent on the back of non-food primary articles and fuel prices,food inflation is ticking up and core inflation is steady.

Though industry associations have been dying for monetary easing,as many as 75 per cent of the participants of an RBS poll of 113 BSE 500 corporates do not believe that there will any rate cuts on Tuesday.

“An overwhelming 75 per cent expect no changes in the repo and reverse repo rates in this policy meeting,with the remaining 25 per cent expecting a cut of 25-50 bps on either side,” an RBS client survey said.

Similarly,83 per cent of the respondents see no cut in the CRR too,due to high inflation and no initiatives from the government. PTI