Ahead of its annual monetary policy, the Reserve Bank today said cutting policy rate to promote investment depends upon moderation in inflation and fiscal consolidation.
"We need to have low inflation, we need to have rising investment ratio, we need to have strong fiscal consolidation and this in turn provides space for monetary policy to actually support investment ..." RBI Deputy Governor Subir Gokarn said at a summit here.
RBI is scheduled to announce annual monetary policy for 2012-13 on April 17. There is widespread expectation that the central bank may cut policy rate later this month to prop up growth and investment.
RBI has been following tight monetary policy stance since beginning of 2010 following spike in prices of commodity.
The central bank has raised rates 13 times between March 2010 and October 2011 in bid to rein in inflation.
Inflation rose to 6.95% in February, 2012 from 6.55% in January.
Since October 2011, the repo or the short-term lending rate of the RBI stands at 8.5%. Repo rate is the singnalling rate. Other policy rates like reverse repo and bank rate adjust automatically with change in the repo rate.
Last month, RBI slashed CRR (cash reserve ratio), the percentage of deposits that banks have to keep with the RBI, from 5.5% to 4.75%. With this, the central bank had infused Rs 48,000 crore into the economy.
This was the second reduction in the CRR since the January 24 policy announcement, when it had slashed CRR by 50 basis points releasing Rs 32,000 crore into the system.
Amid tight liquidity condition, bankers are expecting further cut in the CRR by the RBI.
"My personal stance is that cut CRR. Everything else follows. Lending rate will come down eventually. I would expect 75 basis point cut in CRR," SBI Chairman Pratip Chaudhuri had said after the pre-monetary policy consultation of Indian Banks' Association (IBA) with the Reserve Bank yesterday.
"We saw last year that growth was not very substantial. We have seen the overall interest rate scenario reigning high. So, perhaps some policy measures are required to ensure growth is also catered to without compromising on inflation," M D Mallya, IBA Chairman and CMD of Bank of Baroda said.
Mallya said overall liquidity is likely to improve after government spending starts.
About asset quality, Mallya had said things would improve for better as economy started picking up.