The Hindu Business Line : ‘Now, RBI gets headroom for more rate cuts’

Mumbai, Nov. 13 Single digit inflation after a period of five months may provide fresh impetus to the Reserve Bank of India to cut rates further. In fact, now it is not only feasible for the central bank to cut rates, but even desirable, because economic activity is slowing down, say bankers and economists.

Inflation for the week ended November 1, fell to 8.98 per cent from 10.72 per cent in the previous week. This is closer to the RBI’s estimate of 7 per cent by end-March 2009.

The Index of Industrial Production for September 2008 was 4.8 per cent, as against 7 per cent in the same month last year, indicating a slowdown.

Taking further steps

Mr Saugata Bhattacharya, Vice-President (Business and Economic Research), said now the RBI and Government authorities have headroom to take further steps to boost the slowing economic growth.

“The cost of funds should be brought down to give stimulus for growth. But the rate cuts should come with the proviso that the potential impact of the enormous liquidityinjected into the system, would be calibrated when the situation eases,” he said.

According to Mr Bhattacharya , a combination of reduction in repo, reverse repo and CRR would be desirable as several factors such as the cost of funds and liquidity have to be kept in mind. “There is still demand for funds. And with further FII outflows, there could be need for liquidity,” he said.

Dr Rupa Rege Nitsure, Chief Economist, Bank of Baroda, said, “There is a possibility of a rate cut by RBI before the end of this fiscal. With commodity prices falling and signs of an imminent slowdown, the RBI would not like the high interest rate to be a barrier facing the corporates.”

A cut of 50 basis points in repo rate and a 100 basis points in reverse repo is likely, she said. But RBI would probably watch the inflation data for a few more weeks and then take a call on the rate cut, she added.

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