Rise in retail inflation may force RBI not to cut repo rate

Having delivered a cumulative 50 basis points repo rate cut in the January-March period, the Reserve Bank of India is unlikely to do an encore in its first bimonthly policy statement, which is scheduled to be released on April 7.

An indication to this effect could be gleaned from RBI Governor Raghuram Rajan’s observations in his last monetary policy statement on March 4.

The Governor underscored that further monetary actions will be conditioned, among others, by the pass-through of past rate cuts into lending rates.

Now, while banks have cut deposit rates in the last one month or so, they have not budged on lending rates. So, the central bank may want to see some action from banks on the lending rate front before it eases the monetary policy.

Retail inflation Moreover, what might hold back the central bank from further cutting the repo rate is that retail inflation, as measured by consumer price index (CPI), for February nudged up to 5.37 per cent as against 5.19 per cent in January, and lack of clarity on the monsoon trajectory.

Repo rate is interest rate at which the central bank provides short-term liquidity to banks. Currently, it is at 7.50 per cent. In FY2015, the RBI cut the repo rate twice by 25 basis points each, both outside the policy review cycle, in mid-January and early March.

While there may be no rate cut, bankers expect the central bank to reduce the requirement to maintain minimum CRR (cash reserve ratio) balances so that they have flexibility in liquidity management. This requirement should be reduced to up to 80 per cent (from 95 per cent now) of the average daily required reserves for a reporting fortnight on all days of the fortnight, said the treasury head of a public sector bank.

CRR is the slice of deposits that banks have to park with RBI. Currently, it is at 4 per cent of a bank’s total deposits.

Unexpected events Radhika Rao, Economist, DBS Bank, said after the off-cycle cut in March, no move is likely in April, but accompanying remarks will be of interest.

“Inflation has bounced off November’s low of 3.3 per cent year-on-year to 5.4 per cent in February 2015, but still below January 16 target (of below 6 per cent). The recent bout of unseasonal weather developments and hurt to selected winter crops might stoke worries over food inflation. Global fuel prices have also bottomed out in recent weeks, limiting further downside in inflation prints. A cautious policy statement might hurt optimism,” she said.

Looking ahead, Radhika felt that there is room for another 25 basis points cut (in repo rate) by June and pause thereafter.

Industry body Assocham said the central bank should cut the repo rate by 50 basis points in the first bimonthly policy to nudge banks to move faster on cutting lending rates and give them more comfort on the future trajectory of policy rates.

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