PM's adviser favours cut in reverse repo rate

Prime Minister’s Economic Advisory Council Chairman Suresh D Tendulkar on Tuesday said there is a need to cut the reverse repo rate to discourage banks from parking excess funds with the Reserve Bank of India (RBI).

“Reverse repo has to be brought down, I see it as a possible solution because there will less incentive for banks (for parking excess funds). The rest depends on RBI,” he told reporters on the sidelines of a conference on micro-finance.

“There is an irrational unwillingness among banks to lend,” he said.

There is also some scope for further cutting repo rate in the current financial year ending March 2009, the head of the prime minister’s panel said.

Gilt prices rose on hope that RBI may further slash key rates.

The most-traded 8.24 per cent, 2018 bond rose 20-25 paise to Rs 103.57 on Tuesday.

Over the last one month, the central bank has cut repo rate by 150 basis points to 7.50 per cent, but has kept the reverse repo rate unchanged at 6 per cent. Repo and reverse repo are tools used by RBI to inject and absorb liquidity. “RBI is monitoring liquidity through the call rate,” Tendulkar said.

On inflation, Tendulkar reiterated he sees the headline rate easing to single digit by the early next year.

“International commodity prices are coming down.... Inflation rate coming down is expected. Inflation should come down by the end of the year, and should be in single digit by the early next year,” he said.

According to the latest data, headline inflation rate for the week ended October 25 rose to 10.72 per cent from 10.68 per cent a week ago, halting the declining trend seen for the previous seven weeks.

RBI targets to bring down inflation to close to 7 per cent in the current financial year to March 2009.