RBI may cut rate to spur investment: bankers

But bankers want a CRR cut more than a repo rate cut

Thanks to benign inflation and better fiscal numbers, bankers and industry leaders expect RBI to lower its key policy rate tomorrow to support economic activity and boost investment.

The wholesale inflation hit a new low of (-)2.65% in April, with deflationary pressure holding up for the sixth month. Even retail prices are on the downswing.

The industry and bankers also take comfort from the fact that the government has been able to rein in fiscal deficit within 4% of GDP in 2014-15, providing headroom for RBI to soften up.

RBI led by Governor Raghuram Rajan had snipped the repo rate twice this year in January and March, by 0.25% each, but left it unchanged at the bi-monthly policy meet on April 7.

Indian Banks' Association Chairman T M Bhasin said: "There is a possibility of recalibration this time of (policy) rate as inflation is in the negative territory."

Echoing Bhasin's views, United Bank of India MD and CEO P Srinivas said: "I expect a 0.25% rate cut as retail inflation is better now. If they do not cut rate now, it will be very difficult for them later once El Nino effect comes in. There is a need for a rate cut to boost growth."

Bhasin said as far as bankers are concerned, the preferable mode is passing on the reduction of a CRR cut, which "gives us leeway in reducing rate of interest on advances".

"We have surplus liquidity in the system as there has not been much credit offtake. So, repo window does not give banks any advantage as we don't borrow from banks at this point. So, the CRR window helps us bring down cost of funds. We expect and will request 0.5% cut in CRR, which would release about Rs 40,000 crore into the system," Bhasin added.

Other macroeconomic parameters, too, are shaping up, which has prompted industry bodies, including FICCI and Assocham, to pitch for a softer interest rate.

The repo rate, the level at which RBI lends to banks, stands at 7.5% and the cash reserve ratio, the amount of deposits lenders park with the central bank, is 4%.