BS poll: 25-bp rate cut buzz gains strength among banks

But RBI's guidance expected to be hawkish due to high CAD, retail inflation

With wholesale price index (WPI)-based inflation easing to a 40-month low in March, hopes of a repo rate cut by the Reserve Bank of India (RBI) in its monetary policy review scheduled for May 3 have been renewed.

All the 10 market participants polled by Business Standard said they expected the central bank to cut the repo rate by 25 basis points next month.

After rising to 6.84 per cent in February, WPI inflation fell to 5.96 per cent in March. In March 2012, it stood at 7.69 per cent. Economists feel this could lead to RBI cutting the repo rate.

It is expected the rate, currently 7.5 per cent, would be cut to seven per cent this financial year. “We think RBI will support an easing monetary policy bias in the next few months. Consequently, we expect the central bank to cut the repo rate by clips of 25 basis points in the next two policy meetings (May and June),” said Deutsche Bank economist Kaushik Das.

In 2012-13, RBI had cut the repo rate by 100 basis points in three tranches. In April 2012, the repo rate was cut by 50 basis points. This was followed by two 25-basis point cuts in January and March.

  A few economists said a repo rate cut alone might not lead to a cut in lending rates. “We are expecting the repo rate and the cash reserve ratio (CRR) to be cut by 25 basis points each. A rate cut alone may not be sufficient for banks to revisit lending rates. Currently, the problem is about liquidity tightening; liquidity-easing measures would help,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.

CRR is the proportion of total deposits a bank has to keep with RBI as cash. It is four per cent of banks’ net demand and time liabilities. Since January 2012, CRR has been cut by 200 basis points. The last cut in CRR was recorded in the third-quarter review of monetary policy (2012-13).

Many economists feel RBI’s hawkish stance would continue, owing to a high current account deficit (CAD), as well as high consumer price index (CPI)-based inflation. In the quarter ended December, CAD rose to a record high of 6.7 per cent of gross domestic product (GDP), on account of heavy oil and gold imports and muted exports. In the quarter ended September, CAD stood at 5.4 per cent, while in the quarter ended December 2011-12, it stood at 4.4 per cent.

CPI-based inflation stood at 10.39 per cent in March, compared with 10.91 per cent in February.