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Will the RBI go in for a rate cut, or will it not?
This is the question that bothers many who are eagerly awaiting the apex bank's mid-quarter policy review slated for Monday as far as key rates are concerned.
Though a 100 basis point cut in the Cash Reserve Ratio has been speculated till three days back, the RBI is now facing fresh realities which could be the game-changers for the economy, in general, and the monetary policy, in particular.
The fresh triggers for concern on the inflation front for the apex bank are the increase in food and fuel prices and the more-than-expected hike in the Wholesale Price Index to 7.55 per cent in May from 7.23 pre cent in April.
The hike in minimum support price for paddy, oilseeds and pulses in the range of 15-50 per cent is set to increase inflationary pressures on the economy even if one wants to put up a brave front as regards the weakening rupee and contracting exports, industry experts say.
The statement of the RBI Governor, Dr D. Subbarao, on Thursday that growth had to be sacrificed to tame inflation in a way reflects a sentiment in the central bank that might be different from the market expectations of a big cut in the CRR to the extent of 100 basis points.
This is the question that bothers many who are eagerly awaiting the apex bank's mid-quarter policy review slated for Monday as far as key rates are concerned.
Though a 100 basis point cut in the Cash Reserve Ratio has been speculated till three days back, the RBI is now facing fresh realities which could be the game-changers for the economy, in general, and the monetary policy, in particular.
The fresh triggers for concern on the inflation front for the apex bank are the increase in food and fuel prices and the more-than-expected hike in the Wholesale Price Index to 7.55 per cent in May from 7.23 pre cent in April.
The hike in minimum support price for paddy, oilseeds and pulses in the range of 15-50 per cent is set to increase inflationary pressures on the economy even if one wants to put up a brave front as regards the weakening rupee and contracting exports, industry experts say.
The statement of the RBI Governor, Dr D. Subbarao, on Thursday that growth had to be sacrificed to tame inflation in a way reflects a sentiment in the central bank that might be different from the market expectations of a big cut in the CRR to the extent of 100 basis points.
CRR cut?
The CRR cut now seems unlikely as the need for fresh liquidity is debatable at a time when corporate credit off-take is still low.
Further, a CRR cut without a corresponding repo rate cut is unlikely to result in immediate interest rate cuts by banks as has been demanded by the industry.
So, Dr Subbarao may prefer a cautious approach by keeping the cash reserve ratio untouched at the existing 4.75 per cent. At the same time, the industry concerns could be addressed by lowering the repo rate by 25 basis points.
This will give RBI a chance to wait-and-watch till next quarterly policy.
nagsridhu@thehindu.co.in
Further, a CRR cut without a corresponding repo rate cut is unlikely to result in immediate interest rate cuts by banks as has been demanded by the industry.
So, Dr Subbarao may prefer a cautious approach by keeping the cash reserve ratio untouched at the existing 4.75 per cent. At the same time, the industry concerns could be addressed by lowering the repo rate by 25 basis points.
This will give RBI a chance to wait-and-watch till next quarterly policy.
nagsridhu@thehindu.co.in
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