Stability of rupee seen key to further repo rate cut

Most economists expect status quo on key policy rate in the first quarter review of monetary policy on July 30

Although the monsoon has been progressing well, it might not be the single factor deciding a further cut in the repo rate. According to experts, the stability of the rupee remains the key factor.

However, most economists are expecting status quo on key policy rates in the first quarter review of the monetary policy on July 30, while a few are expecting a cut in the cash reserve ratio (CRR).

According to a report by Bank of America Merrill Lynch, the Reserve Bank of India (RBI) might not cut the repo rate but could cut CRR on July 30. “We are relieved that the monsoon is progressing well. Yet, RBI will likely not want to stir controversy by cutting rates until the rupee stabilises,” said Indranil Sen Gupta of the bank in a note to clients. If the rupee remains volatile, Sen Gupta expects RBI to cut CRR by 25 basis points, instead of rates, to support growth.

CRR is the proportion of total deposits a bank has to keep with RBI as cash. Currently, CRR is four per cent of banks’ net demand and time liabilities. According to Partha Bhattacharya, deputy CEO of Mecklai Financial, the banking system has seen liquidity in the negative zone for the three years, due to which the central bank should cut CRR further.

  However, there are economists who do not expect even a CRR cut on July 30, in a scenario when bank borrowings under RBI's daily liquidity adjustment facility (LAF) has been in RBI's comfort zone. In the past month, the daily average LAF borrowing has been about Rs 65,000 crore.

“Seeing the current liquidity scenario, I do not see a possibility of CRR cut on July 30. I do not even expect a repo rate cut on July 30. According to me, there is very limited downside in inflation, rupee depreciation has built up inflationary pressures and the overall atmosphere on currency issues have not abated,” said Indranil Pan, chief economist at Kotak Mahindra Bank. The repo rate was cut by 25 basis points each in January, March and May. Currently, it is 7.25 per cent. The rupee ended at 59.52 a dollar on Monday, compared to the previous close of 59.39, due to dollar demand by oil companies.