RBI may cut rate to spur investment

With inflation and fiscal deficit under control, bankers and industry leaders expect the Reserve Bank to lower its key policy rate tomorrow to support economic activity and boost investment.
The wholesale price index based inflation hit a new low of (-)2.65 per cent in April, as deflationary pressures continued for the sixth month. Even retail inflation is on the downswing.
Industry leaders and bankers also take comfort from the fact that the government has been able to rein in fiscal deficit within 4 per cent of GDP in 2014-15, providing headroom for RBI to soften up.
RBI Governor Raghuram Rajan has snipped the repo rate twice this year, in January and March, by 0.25 per cent each, but left it unchanged at the bi-monthly monetary policy review 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."
United Bank of India MD and CEO P Srinivas said: "I expect a 0.25 per cent 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."

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", Bhasin said.

There is a surplus liquidity in the system as there has not been much credit offtake, he said, adding: "So, repo window does not give banks any advantage as we don't borrow from banks at this point. The CRR window helps us bring down cost of funds. We expect and will request 0.5 per cent cut in CRR, which would release about Rs 40,000 crore into the system".
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, at which RBI lends to banks, stands at 7.5 per cent and the cash reserve ratio, the amount of deposits lenders park with the central bank, is 4 per cent.