RBI may cut interest rate by up to 0.50% to propel growth

With inflation under check and government sticking to its fiscal consolidation path, market expectations are that RBI may cut interest rate by up to 0.50% in its first bi-monthly monetary policy review for 2016-17 on Tuesday in order to propel growth.

The government has also pared the small savings interest rate by up to 1.3% providing cushion to the Reserve Bank for cutting the policy rate.

Finance Minister Arun Jaitley too had last week expressed desire that the RBI should cut rate, stating "I want what everybody wants. At this stage if rate cuts do take place it's certainly going to be helpful because you need a more efficient economy and you need a more competitive cost of capital".

Bankers said high interest rate could make Indian economy sluggish given that inflation is around 5%.

"There is possibility of RBI reducing rate by 0.25% as inflation has eased," Bank of Maharashtra Chairman and Managing Director Sushil Muhnot told PTI.

According to a senior official from a state-run bank, although a 25 basis points has been factored in by the market there is also a high possibility of RBI going for a 50 basis points rate cut.

Citing various factors for easing of monetary stance, industry chambers are pitching for 0.5% cut in the key interest rate.

A 0.25% cut in the policy rate by the RBI is almost given, but the real impact of falling lending cost can be felt only if the central bank goes in for a bold reduction of at least 0.50%, industry body Assocham said.

Retail inflation as measured by the Consumer Price Index (CPI) eased to 5.18% in February as food prices rose at a slower pace, while Wholesale Price Index stayed in the negative territory for the 16th month in a row.

Industrial output for the third month in a row remained in the negative territory contracting 1.5% in January due to poor showing of manufacturing sector raising industry clamour for rate cut by the RBI.

RBI Governor Raghuram Rajan on March 12 said government's sticking to fiscal consolidation roadmap of reducing deficit to 3.5% of the GDP in 2016-17 was comforting, a statement which raised hope for rate cut in April 5 monetary policy.

Rajan, on February 2, had left the key interest rate unchanged citing inflation risks and growth concerns.

As for the forthcoming policy review, Union Bank Chairman and Managing Director Arun Tiwari said: "I see a 25 basis points rate cut as inflation has come under the Reserve Bank's target."

SBI Chairman Arundhati Bhattacharya has said, meanwhile, that RBI should outline steps to curb the volatility in systemic liquidity.

"We expect RBI to address the issues of systemic liquidity," Bhattacharya has said.

Currently, high volatility in currency holdings of public (both in the form of cash and jewellery) as well as government's cash balances with RBI is leading to volatility in systemic liquidity, she had said.

According to Citigroup report, the RBI is expected to cut repo rate by 0.25 percentage point given that the budget stayed on the path of fiscal consolidation and progress has been made on the reforms front.

The case for a rate cut becomes even stronger considering the benign CPI outlook and a strengthened transmission mechanism (quarterly reset in small savings rate, MCLR).