RBI move to have no impact on lending rates: Morgan Stanley

Report says CPI inflation will trend down in three months on fiscal consolidation measures

International brokerage Morgan Stanley today said the 0.25% rate cut by the Reserve Bank will not be effective unless the consumer price index inflation falls, coupled with an improvement in deposit growth.

"We believe policy rate cuts will not likely be effective until we see meaningful deceleration in CPI inflation and improvement in deposit growth," its economists said in a note.

The report said persistently high CPI inflation, which stood at 10.91% in February, is leading to elevated expectations, which in turn is hampering deposit growth and also leads to an increase in gold imports.

The note also referred to moves by the largest lender SBI since the January policy announcement, where the RBI had cut both the repo rate and the cash reserve ratio by 0.25%.

SBI has increased its deposit rate by 0.25% due to a slowdown in deposit accretion and cut its base rate only by 0.05%, the note pointed out.

However, it offered some optimism saying CPI inflation will trend down in three months on fiscal consolidation measures and moderating rural wage growth.

On the growth front, it said the government actions, and not the monetary policy, hold the key for a revival.

For the remainder of the calendar year, the note said it saw limited scope for more easing and thus estimated 0.25-0.50% reduction by December.

British banking major Standard Chartered also cut its house view on rate cut expectations following RBI's cautious tone on its outlook in mid-quarter policy statement yesterday.

"We now expect RBI to cut rates by only another 25 bps in FY14, versus our previous view of 50 bps," it said.

The RBI had said the high current account deficit and the likelihood of inflation staying range bound in the 6% plus levels are the inhibiting factors that limit the possibilities of a further rate cut in future.