MPC likely to propose 0.25 percent rate cut

The meeting of the six-member Monetary Policy Committee (MPC) will begin today amid widespread expectations of at least 0.25 percent rate cut in policy rates to cushion the impact of demonetisation.

This will be the second meeting of the MPC headed by RBI Governor Urjit Patel after October, where the central bank had announced a rate cut of 0.25 percent to 6.25 percent.

This will be the first monetary policy review after demonetisation of old Rs. 500 and Rs. 1,000 currency notes, following which banks witnessed surge in deposits.

According to the banking sector, it's difficult to predict what the monetary policy committee will now decide.

"There are chances of like 25-50-basis point cut by the RBI," said SBI Managing Director Rajnish Kumar.

Echoing similar views, IDBI Bank CFO R.K. Bansal said the central bank will ease the repo rate to six percent.

"The new two quarters are very important and they would like to see the impact of demonetisation," added Bansal.

The RBI is unlikely to continue to apply the incremental Cash Reserve Ratio (CRR). In order to manage liquidity conditions, the RBI had on November 28 asked the banks to maintain an incremental CRR of 100 percent on deposits accrued between September 16 and November 11, 2016.

The temporary hike in CRR due to high deposits with banks is not a concern, but the RBI should cut the repo rate by 0.25 percent to six percent in next policy review in December to adjust balance between high liquidity and interest rates.

According to SBI, there is an expectation that inflation in November will be below four percent.