RBI's Credit Policy Meeting Today, Rate Cut Unlikely
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RBI's Credit Policy Meeting Today, Rate Cut Unlikely

Tuesday, 31 July 2012, 05:23 Hrs
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In view of high inflation and deficient monsoon rainfall, the Reserve Bank may find it difficult to cut the key lending rate to boost the economy as is being demanded by the industry. Although bankers expect RBI to cut the Cash Reserve Ratio (CRR) by up to 0.50 percent in the monetary policy review on 31 July, it would not be possible for the central bank to heed to India Inc's demand as inflation, at over 7 percent, is much above its comfort level.



Moreover, uncertainty over monsoon is likely to put pressure on prices of essential commodities. On an average, rainfall deficiency across the country is 21percent so far.



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



While GDP growth hit a nine-year low last fiscal at 6.5 percent, WPI-based inflation was at 7.25 percent in June. Retail inflation is hovering at 10.02 percent.



RBI had left policy rates and CRR -- a portion of deposits that banks are required to keep with the central bank -- unchanged at the last meeting on June 16.



Meanwhile, Subbarao said recently that RBI will study the relationship between high interest rates and growth slowdown.



Bankers, meanwhile, have said that they expect a 0.5 percent reduction in CRR, which currently stands at 4.75 percent. They, however, do not see a reduction in the repo rate from the current 8 percent.



"We expect a 50 basis point 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," State Bank of India Chairman Pratip Chaudhuri said.



"A negative relationship between real output growth and real interest rates does exist, and as such real interest rate matters for growth and investment." it said.



In spite of the rate hikes, real interest rates are lower than in the pre-crisis period, it said.



"In this context, there is a need to look at non-monetary factors that are constraining growth as current monetary and liquidity conditions are not impinging upon growth significantly," it added.



"A 0.50 percent repo rate cut, following a 1.25 percent CRR (Cash Reserve Ratio) reduction, coupled with active open market operation purchases have significantly eased monetary and liquidity conditions during 2012-13 so far," it said.



Making a case for investment stimulus, the RBI said, corporate sales decelerated along with continued decline in profits and could adversely impact investments ahead.



"In this situation, crowding-in of private investment demand by public investment spending stimulus while aggressively cutting expenditure on subsidies hold the key to growth revival," it said.



Despite widespread demand for cut in interest rate, RBI in its last review in April had refrained from easing policy rates.



The pro-growth lobby, which was alarmed over quarterly growth slipping to a nine-year low of 5.3 percent for the March quarter, wanted the RBI to slash interest rates to prop up growth.



On monsoon movement, RBI said deficiencies can have an adverse impact on food inflation.



Until July 27, the monsoon was deficient by 21 percent compared with the long period average.



This is likely to impact kharif crops, especially coarse cereals and pulses, RBI said.



"Risks to inflation remain from unsatisfactory monsoon and increases in MSP (Minimum Support Price) even as growth slowdown eases demand pressures," it said.



While core inflationary pressures are currently muted, it said, "a continued rise in real wages may spill over to core inflation," it said.


Source: PTI
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