Major Indian bankers have low expectations for an interest rate cut by the Reserve Bank of India (RBI) at its next policy meeting on October 30.
“Not immediately,” Santosh Nayar, deputy managing director of State Bank of India, told Business Standard. In an interview, HDFC Chairman Deepak Parekh said, “I don’t see (an interest rate cut) unless inflation numbers are better. If it’s 6.5 per cent, it might come down but again (it will be) modest, very modest.”
India’s wholesale price index surged by a higher than expected 7.55 per cent in August.
The current rates of inflation are well above the benchmarks communicated by RBI, of keeping headline inflation below five per cent and core inflation around four per cent.
Speaking on the sidelines of the annual India Investment Forum here, RBI Deputy Governor Subir Gokarn said the central bank would spend two to three weeks before the policy review in taking stock of developments since the previous meeting.
Referring to recent measures announced by the government, including a reduction in fuel subsidies, he said, “Clearly, this time we have these added elements, specific actions taken by the government which will directly address risks that we’ve been pointing out on fiscal situation, balance of payments and so on. Eventually, they all have to be evaluated on their overall impact on the growth-inflation balance.”
SBI’s Nayar felt a cut in interest rates was necessary to spur growth. “The earlier it happens, the better for everybody but conditions have to become all right for that,” he said. He also noted the recent rise in diesel prices would make it harder to curb inflation in the short term.
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The bankers agreed the cut in the cash reserve ratio or CRR by 25 basis points to 4.5 per cent, announced by RBI after its last policy meeting on September 17, was effective. Parekh said it was essential to ease banks’ liquidity crunch. “There is tightness in liquidity…Deposit growth has been tardy and the advances have not been tardy, so there is a gap,” he said.
Nayar felt the CRR cut was intended more to communicate a positive sentiment to the markets. “It’s not because of a liquidity problem. We need to send a signal that interest rates have to come down,” he said. “After all, business runs more on sentiment than anything else.”
Parekh expects GDP to grow at six per cent this year but believes a higher rate is unlikely. This week, Standard & Poor’s lowered its growth forecast for India to 5.5 per cent. Parekh said the recent reforms announced by the central government were partly prompted by the need to safeguard India’s investment grade rating.
“Downgrade to a non-investment level would have been a disaster,” he said. “About $80-100 billion would have gone out of India, which would have led to the collapse of the currency and the economy. So, I think the consequences of not doing this were far severe, far more critical than doing this.”