BS Poll: Reserve Bank may not cut the repo rate further next month

Thrust may be to ensure that benefits of previous cuts are passed on by reduction in lending rates

Despite the easing inflation numbers, the Reserve Bank of India (RBI) may not cut the repo rate further in the mid-quarter review of the monetary policy on June 17. This is because experts feel the focus of the central bank is likely to be on liquidity management through a cut in the cash reserve ratio (CRR), which currently stands at four per cent of banks net demand and time liabilities.

Business Standard polled 12 experts, including economists, treasury heads and fund managers. Eight of them expect a status quo on key policy rates in the policy review next month.

Many experts believe RBI’s thrust may be to ensure that the benefits of the previous cuts are passed on by banks by reducing lending rates further.

“At its next policy meet in June, we expect only a 25-basis-point CRR cut as the focus is likely to be on reinforcing policy transmission,” said Sonal Varma and Aman Mohunta of Nomura in a report. However, they do expect a gradual rate cutting cycle with a 50-basis-point repo rate cut in the second half of 2013.

The repo rate currently stands at 7.25 per cent. “While RBI has cut the policy rate by 75 basis points since the beginning of this year, we believe it will take a while before these policy rate cuts can be fully transmitted to a reduction in lending rates. The key reason why the transmission has not happened as yet is due to the tight liquidity in the banking system,” said Upasana Chachra and Chetan Ahya of Morgan Stanley in a report.

The wholesale price index (WPI) inflation plunged to 4.89 per cent in April against 5.96 per cent in the previous month, while the consumer price index (CPI) inflation fell to 9.39 per cent in April against 10.39 per cent in the previous month. According to J Moses Harding, head, asset-liability committee and economic and market research, IndusInd Bank, easing of inflation is largely driven by poor growth and liquidity squeeze. Improvement in growth pick-up and easing liquidity will drive inflation up. Hence, RBI is not expected to turn dovish at this stage.

The central bank expects WPI inflation to be range-bound around 5.5 per cent during 2013-14. However, it also cautioned that there may be some rise in the WPI numbers in the second half of the financial year on account of the base effect.

 

But there are a few experts who believe the apex bank will cut the repo rate further next month. According to Abheek Barua, chief economist, HDFC Bank, WPI inflation for April should provide considerable comfort to RBI, especially with core inflation falling to 2.7 per cent in April from 3.4 per cent a month ago.

“We continue to expect a 25-basis-point repo rate cut in the mid-quarter review followed by possibly one more cut of 25 basis points over the remainder of 2013,” said Barua.

The yield on the 10-year benchmark government bond 8.15 per cent 2022 ended at 7.46 per cent today compared with previous close of 7.47 per cent. According to S Srinivasaraghavan, executive vice-president and head-treasury of Dhanlaxmi Bank, if RBI maintains a status quo on June 17, the yield will climb up to 7.60 per cent.