RBI likely to cut rates by 25 basis today as India battles demonetization

The Reserve Bank of India (RBI) Governor Urjit Patel is set to present his second monetary policy review in the midst of the "demonetisation" exercise that has disrupted individuals and businesses alike here today.

The RBI, guided by the newly-formed six-member monetary policy committee (MPC), is widely expected to cut its key lending rate by 25 basis points to six percent.

The decision will be likely be influenced by two factors, which is fall in consumer and investment spending because of the currency drain out, and the outlook on inflation and the rupee's value.

While India, at 7.3 percent growth in July-September, remains the world's fastest-growing major economy, ahead of 6.7 percent growth in China that is battling an industrial deceleration, question marks remain over its ability to hold on to that status following the demonetisation drive.

A cut in the repo rate, the rate at which the RBI lends to banks, should ideally bring down banks' borrowing costs, eventually leading to lower loan rates for companies and individuals.

According to the market analysts, fuel prices are set to rise from January after the Organisation of Petroleum Exporting Countries (OPEC), a cartel of oil producers agreed to cut back production from the beginning of 2017.

The unexpected surge in demonetisation-induced liquidity has forced the RBI to temporarily ask banks to park the entire amount of cash as 100 percent cash reserve ratio (CRR) with the central bank.