Bangalore: Bankers expect RBI to cut cash reserve ratio by up to 0.50 percent in its policy review on July 31 even as drought is staring at the country which could fuel price rise.

Bankers are looking at a reduction in the cash reserve ratio (CRR) and not a cut in the key lending rates - given the piquant macroeconomic conditions and the stubborn price index, though privately most of them admit that the Governor has no leg-room to heed to their demand.

RBI Governor D Subbarao will unveil the first quarter monetary policy review on Tuesday, and if his recent comments on inflation and fiscal and current account deficit numbers are any indication, it will be a non-event.

While GDP growth hit a nine-year low last fiscal at 6.5 percent last fiscal, inflation remains high at 7.25 percent 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 percent reduction. The CRR currently stands at 4.75 percent.

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

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 percent while that for a Chinese equipment manufacturer is only 4 percent. 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."