Bankers expect RBI to cut cash reserve ratio by up to 0.50 per cent in its policy review on July 31 even as drought is staring at the country which could fuel price rise.

Bankers are looking at a reduction in the cash reserve ratio (CRR) and not a cut in the key lending rates — given the piquant macroeconomic conditions and the stubborn price index, though privately most of them admit that the Governor has no leg-room to heed to their demand.

RBI Governor D Subbarao will unveil the first quarter monetary policy review on Tuesday, and if his recent comments on inflation and fiscal and current account deficit numbers are any indication, it will be a non-event.

While GDP growth hit a nine-year low last fiscal at 6.5 per cent last fiscal, inflation remains high at 7.25 per cent for June.

RBI left policy rates and CRR unchanged at the last meeting on June 16, arguing that there is tangible evidence that higher interest rates have led to growth slowdown.

Among the bankers who have gone public with CRR cut demand is the State Bank of India chairman Pratip Chaudhuri, who expects a 0.5 per cent reduction. The CRR currently stands at 4.75 per cent.

Chaudhuri also says he does not see a reduction in the repo rate from the current 8 per cent.

Chairmen of Central Bank and Union Bank, M V Tanksale and D Sarkar respectively, also hold similar view.

“We expect a 50 bps reduction in CRR to ease money supply. Also a CRR cut will have a cooling effect on the interest rates for customers apart from better effect on monetary transmission than a repo cut,” Chaudhuri said, pointing out that last time there was no CRR cut and so there is a strong case for this time.

Explaining the rationale, Chaudhuri said this will help banks’ liquidity, which in turn will help them lower the lending rates, thus helping the monetary transmission better.

On the contrary, a marginal reduction in the repo will not help banks to cut lending rates.

(This article was published on July 29, 2012)
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