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RBI may cut policy rate to spur investment: Bankers

 The Hawk |  2015-05-31 07:34:30.0  0  Comments

New Delhi: RBI is expected to cut its policy rate on Tuesday to prop up economic activity and boost investment as inflation remains low and fiscal deficit has been contained. Deflationary pressure persisted for the sixth month in a row as fall in prices of fuel and manufactured items pulled the wholsale inflation to a new low of (-)2.65 per cent in April. Besides, retail inflation has also been falling. Industry and bankers are hopeful of a rate cut as the government has also been able to rein in fiscal deficit within 4 per cent of GDP in 2014-15 providing room for easing of monetary policy. "There is a possibility of recalibration of (policy) rate as inflation is in the negative territory," Indian Banks' Association Chairman T M Bhasin told PTI. Echoing similar views, 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." Bhasin said as far as bankers are concerned, the preferable mode is passing on the reduction of CRR cut, which gives us leeway in reducing rate of interest on advances. "We have surplus liquidity in the system as there has not been much credit offtake so repo window does not give banks any advantage as we don't borrow from banks at this point. So, 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 in the system," Bhasin added. Encouraged by macroeconomic parameters, industry chambers are also pitching for cut in interest rate. Industry bodies including Ficci and Assocham have put forth the demand for cut in the interest rate. In the last bi-monthly monetary policy released on April 7, RBI Governor Raghuram Rajan had left policy rate or repo rate unchanged. However, the central bank had lowered its policy rate twice in January and March by 0.25 per cent each. The repo rate, at which the RBI lends to the banking system, currently stands at 7.5 per cent and the cash reserve ratio, which is the amount of deposits parked with the central bank, is 4 per cent. Bank of India Chairperson and Managing Director V R Iyer said: "Of course the macro parameters are fairly good but due to inflationary expectations do not look very encouraging so that may deter RBI to do anything beyond 25 basis points." Federal Bank CEO and Managing Director Shyam Srinivasan said there could be easing of monetary policy this time. Finance Minister Arun Jaitley and Chief Economic Advisor Arvind Subramanian also expressed hope of rate cut by the RBI. "My views are well-known. It is (the time)," Jaitley had said at a press conference on completion of one year of the government.Citing low inflation and under control fiscal deficit, Subramanian had pitched for a rate cut by the RBI at its monetary policy review meeting next week. "Looking at the analysis of what is the inflation forecast, what is the fiscal consolidation, what is the international environment...And how monetary policy should respond, I think there is scope for monetary easing." Ficci pitched for a 0.50 per cent cut in the benchmark interest rate to revive private investments and stimulate demand for housing, automobiles and consumer durables sectors. "With inflation largely under control, we expect the Central Bank to reduce the repo rate by at least 50 bps to expedite revival of private investments and demand for housing, automobiles and consumer durables. "A cut in CRR by 50 bps is also desirable as it will release liquidity in the system and enable effective transmission into lower lending rates by banks," Ficci President Jyotsna Suri said. During the last fiscal, Indian economy grew by 7.3 per cent, up from 6.9 per cent a year ago but lower than earlier estimate of 7.5 per cent, mainly due to improvement in services and manufacturing sectors. The Reserve Bank is slated to unveil the second bi-monthly monetary policy on June 2. PTI

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