RBI expected to cut policy rates till 2013 end

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SME Times News Bureau | 19 Mar, 2013
The RBI is expected to go in for a 25 basis points rate cut Tuesday while reviewing the monetary policy to spur economic growth, say bankers and economists. They said they expect the RBI to continue cutting policy rates by 50-75 basis points till end of the calendar year.

However, they do not discount the possibility of the Reserve Bank of India (RBI) maintaining status quo and deciding on rate cuts in the new fiscal.

"Now the government has expressed its serious intention to contain fiscal deficit. The core inflation is also down. So, we expect RBI to cut the policy rates by 25 basis points percent," Indian Overseas Bank (IOB) chairman and managing director M. Narendra told IANS.

According to him, some also are of the view that the RBI may wait for the new fiscal to begin to decide on the policy rates as the time gap between March 19 and the new fiscal (beginning April) is not much.

However, the dominant view is in favour of the RBI going in for a policy rate cut.

Speaking to IANS, Jyotinder Kaur, an economist at HDFC Bank, said: "In line with the market expectations we expect 25 basis points rate cut and the condition for that continues to be present."

"The RBI will go in for rate cuts in the new fiscal (2013-14) till the end of the calendar year. We expect rate cuts at least by 50 basis points by the end of this calendar year."

Agreeing with her, an economist with a private bank who did not want to be named told IANS: "The expectation is that the RBI to cut the policy rates by 50-75 basis points through the calendar year 2013 and then take stock when the inflation is expected to pick up around the year end."

He said the marginal growth in industrial production is not a turn around and so a rate cut is expected.

According to Narendra, banks may not be able to pass on the rate cut benefits to the borrowers as their cost of deposits continues to be high and did not come down.

A private sector banker said that banks continue to borrow under the reverse purchase window and hence the rate cut benefits have not been passed on to the borrowers.

But the situation would change in the new fiscal, he added.

In the previous review announced Jan 29 this year, the RBI had lowered all the key policy rates by 0.25 percent.

The repurchase rate, or the interest on short-term borrowings by commercial banks, was cut by 25 basis points to 7.75 percent and the reverse repurchase rate, or interest on short-term lending, was lowered by 25 basis points to 6.75 percent.

During the last review, the central bank had also cut the cash reserve ratio, or the money commercial banks have to retain in the form of liquid assets in proportion to their deposits, by 0.25 percent to 4 percent.