Benign inflation, Fed status quo give RBI room for rate cut: bankers

Most expect 25 bps rate cut from the central bank

RBI Governor Raghuram Rajan may cut interest rates with a view to spur economic recovery and mitigate the impact of a slowing China on India.

Most of the bankers feel that benign inflation and status quo by US Fed has given room for the RBI to cut short-term lending (repo) rate by at least 0.25% to 7%.

Finance Minister Arun Jaitley had last week said that common sense says the interest rates should come down.

Jaitley had said inflation is "very much under control" and the country is better prepared than most emerging economies to weather the global economic turbulence.

Global turmoil triggered by devaluation of yuan and reports of slowing growth in China has impacted Indian currency and stock markets.

As regards the price situation, the wholesale price index (WPI) remained in negative territory for 10 months in a row and stood at (-)4.95%, while the retail inflation (CPI) eased to a record low of 3.66% in August.

However, first quarter GDP number of 7% was below market expectation.

These macro-economic details would be taken into account by the RBI during its fourth bi-monthly monetary policy review of this fiscal on September 29.

According to State Bank of India (SBI) Chairman Arundhati Bhattacharya, there is a space for rate cut as the possibility of food prices going up in coming months is negligible.

"I do still believe that there is a space for rate cut in India. How much is difficult to state at this point of time," she said.

There is a possibility of 0.25% rate cut by the RBI, according to Union Bank of India Chairman & MD Arun Tiwari.

"I see a 25 basis points rate cut on September 29. But there will be no change in SLR and CRR as liquidity in the system is enough," Tiwari said.

Echoing similar views HSBC India country head Naina Lal Kidwai said there is a strong chance of RBI cutting interest rate by 0.25% on September 29 as inflation has come under control.

With decline in inflation and the US Fed handing emerging markets a lifeline by not raising interest rates, there is a "favourable" environment for monetary policy action by the RBI, Minister of State for Finance Jayant Sinha had said.

Earlier this month, the Fed heeded to calls from the World Bank and IMF by deciding not to go for first rate increase in almost a decade, stemming outflows from emerging economies.

On expectations from RBI policy review, Bank of Maharashtra executive director R K Gupta said: "With macroeconomic parameters improving, RBI is likely to cut repo rate. Also, there is pressure on RBI to support credit growth which has been muted for some time."