Most market players are expecting at least 25 basis points (bps) reduction in key interest rates by the Reserve Bank of India in its annual monetary policy review on Friday. Amid slowing inflation and falling commodity prices, bankers and economists are expecting the RBI to take measures to revive the growth momentum.

“Given the deceleration in growth along with easing inflation, a 25 bps repo rate reduction is expected. To address liquidity, the RBI may look at short-term instruments like open market operations (OMO) over a reduction in CRR (cash reserve ratio), which is already at a four-decade low,” said Shubhada Rao, Chief Economist, YES Bank.

At present, the repo rate and CRR stand at 7.50 per cent and four per cent, respectively.

Favourable conditions

With wholesale price index-based inflation touching its lowest in three years at 5.96 per cent in March and on expectations of good monsoon, the situation is favourable for a reduction in key interest rates.

In addition, falling commodity prices is likely to lower the current account deficit (CAD), which touched a record high of 6.7 per cent. Economists feel there is a significant probability that the central bank will cut its repo rate one time before pausing in September.

Rupa Rege Nitsure, Chief Economist, Bank of Baroda, “We are expecting a 50 bps cut in repo rate or a 25 bps cut in repo rate cut and CRR each. The RBI may frontload now as the situation may be uncertain after May.” However, bankers have indicated that a 25 bps repo rate cut might not immediately help them to cut lending rates unless liquidity concerns are addressed.

The Reserve Bank has maintained that in case of liquidity tightening, it will continue to actively manage liquidity through various instruments, including OMOs, so as to ensure adequate flow of credit to productive sectors of the economy.

beena.parmar@thehindu.co.in

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