High inflation may prevent RBI from cutting rates

In view of high inflation and deficient monsoon rainfall, the Reserve Bank may find it difficult to cut the key lending rate to boost the economy as is being demanded by the industry.

Although bankers expect RBI to cut the Cash Reserve Ratio (CRR) by up to 0.50% in the monetary policy review tomorrow, it would not be possible for the central bank to heed to India Inc's demand as inflation, at over 7%, is much above its comfort level.

Moreover, uncertainty over monsoon is likely to put pressure on prices of essential commodities. On an average, rainfall deficiency across the country is 21% so far.

 

RBI Governor D Subbarao will unveil the first quarter policy review and if his recent comments on inflation as well as fiscal and current account deficit numbers are any indication, it may turn out to be a non-event.

While GDP growth hit a nine-year low last fiscal at 6.5%, WPI-based inflation was at 7.25% in June. Retail inflation is hovering at 10.02%.

RBI had left policy rates and CRR -- a portion of deposits that banks are required to keep with the central bank -- unchanged at the last meeting on June 16.

Meanwhile, Subbarao said recently that RBI will study the relationship between high interest rates and growth slowdown.

Bankers, meanwhile, have said that they expect a 0.5% reduction in CRR, which currently stands at 4.75%.

They, however, do not see a reduction in the repo rate from the current 8%.

"We expect a 50 basis point reduction in CRR to ease money supply. Also a CRR cut will have a cooling effect on the interest rates for customers apart from better effect on monetary transmission than a repo cut," State Bank of India Chairman Pratip Chaudhuri said.