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Market participants expect a 25-50 basis points cut in the cash reserve ratio (CRR) even as key policy rates are likely to be left untouched by the Reserve Bank of India (RBI) on Tuesday.
Price worry
Inflation will stay the RBI’s hand when it comes to the policy rates. With the latest September inflation hovering at a 11-month high at 7.8 per cent, way above the RBI’s comfort zone, a rate cut is unlikely to figure in the October 30 policy.
Further, on Monday, the RBI’s survey revised upwards the average WPI inflation to 7.7 per cent from 7.3 per cent.
The central bank had cut CRR by 25 bps in the September policy that released Rs 17,000 crore into the system. CRR is the part of deposits that banks have to park with the RBI.
Liquidity deficit
In the current festival season, liquidity deficit for the banking system is likely to increase.
M. Narendra, Chiarman and Managing Director, Indian Overseas Bank, said, “I am sure that the CRR will be cut by 25-50 basis point in this policy.” According to Shubhada Rao, Chief Economist, YES Bank, “Given the widespread anticipation of reciprocity in response to the recent government measures, we see an outside chance of a cut in CRR of 25 bps. Liquidity will receive larger policy focus.”
Says Rupa Nitsure, Chief Economist, Bank of Baroda, “The RBI should maintain status quo and not reduce either rates or CRR. At the same time, it should give enough confidence about its monitoring of the evolving liquidity scenario and indicate which measure it would like to use (CRR or OMOs or a combination of both) as and when it sees some degree of tightness in liquidity.”
Ashutosh Khajuria, Head-Treasury, Federal Bank, said, “Liquidity deficit has increased to nearly Rs 1-lakh crore which is more than 1 per cent of net demand and time liabilities (NDTL) of the banking system.”
“As the primary inflation (mainly, food inflation) is showing signs of moderation, the RBI has a case for slight reduction in policy signalling interest rate. A repo rate, therefore, may be cut by 25 bps,” Khajuria said.
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