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With overall economic growth going down, the Government may advise the Reserve Bank of India (RBI) to not just cut interest rates but also improve liquidity by cutting the statutory cash reserve ratio (CRR).
The RBI is scheduled to review its credit and monetary policy on March 15, a day before the presentation of the Union Budget.
According to a Government source, “Manufacturing is at a low and considering the demand for credit in the last quarter, we feel RBI could use both the monetary measures to pump up the economy.” The central bank cut CRR by half a percentage point on January 24 to infuse Rs 32,000 crore into the system.
However, this infusion does not appear to have had a major impact on easing liquidity. This is clearly evident from the borrowing by the banks under the RBI's Liquidity Adjustment Facility (LAF). The first three working days of the week have seen borrowings of over Rs 1.75 lakh crore every day.
Government sources listed two concerns. One, liquidity is tight and second, what money is available is costly.
Explaining the concern, a senior banker said that short-term loans are being given either at base rate (for AAA rated companies) or at base rate plus two to four per cent. “If we take an average base rate of 10 to 10.75 per cent, that means loans are available in the range of 10 to 14.75 per cent,” he added.
“If we take an average base rate of 10 to 10.75 per cent, that means loans are available at 12 to 14.75 per cent,” he added.
So, can RBI go for rate cut?
Mr Sunil Sinha, Senior Economist, Crisil, does not think so, while Ms Sonal Verma, India Economist of Nomura Financial Advisory, feels there is very little probability of a rate cut.
Mr Sinha said, “Inflation has certainly moderated but inflationary expectation is very high. Taking cue from the statement in the last policy review, we expect RBI will wait for fiscal action before taking any call on a rate cut.”
Fiscal action here means changes in excise and customs duty and these are expected in the forthcoming Budget.
On the other hand, Ms Verma said, “At the March 15 meeting, our base case has the RBI keeping the repo rate unchanged (we assign a 30 per cent probability to a 0.25 percentage point repo rate cut).”
However, both Mr Sinha and Ms Verma expect CRR to be cut by 0.50 percentage point. Mr Sinha also added that one percentage point cut of Statutory Liquidity Ratio (SLR) will be desirable.
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