New Delhi : The Reserve Bank of India (RBI) is expected to cut its policy rate by 25 basis points on Tuesday to prop up economic activity and boost investment even as risks to the inflation trajectory are seen rising.

Deflationary pressure persisted for the sixth month in a row as fall in prices of fuel and manufactured items pulled the wholsale inflation to a new low of (-)2.65 per cent in April. Besides, retail inflation has also been falling.

Industry and bankers are hopeful of a rate cut as the government has also been able to rein in fiscal deficit within 4 per cent of GDP in 2014-15 providing room for easing of monetary policy.

“There is a possibility of recalibration of (policy) rate as inflation is in the negative territory,” Indian Banks’ Association Chairman T M Bhasin told PTI. Echoing similar views, United Bank of India MD and CEO P Srinivas said: “I expect a 0.25 per cent rate cut as retail inflation is better now. If they do not cut rate now, it will be very difficult for them later once El nino effect comes in. There is a need for a rate cut to boost growth.”

Last month, the India Meteorological Department projected below normal southwest monsoon rains for this year, at 93% of the long period average.

The Australian Bureau of Meteorology this week predicted that the sea surface temperatures are likely to remain well above El Nino thresholds till the end of the Indian southwest monsoon season.

Bhasin said as far as bankers are concerned, the preferable mode is passing on the reduction of CRR cut, which gives us leeway in reducing rate of interest on advances.

“We have surplus liquidity in the system as there has not been much credit offtake so repo window does not give banks any advantage as we don’t borrow from banks at this point. So, the CRR window helps us bring down cost of funds. We expect and will request 0.5 per cent cut in CRR which would release about Rs 40,000 crore in the system,” Bhasin added. Encouraged by macroeconomic parameters, industry chambers are also pitching for cut in interest rate. Industry bodies including Ficci and Assocham have put forth the demand for cut in the interest rate.

Some participants also voiced concerns about the rise in global crude oil prices, with India’s crude oil basket having risen to $62.22 per barrel, up 11% since the RBI’s April policy review.

In its Apr 7 policy review, the central bank had said future rate actions would be conditioned by transmission of past rate cuts by banks, monsoon and inflation trajectory, key economic reforms by the government and normalisation of US interest rates.

Federal Bank CEO and Managing Director Shyam Srinivasan said there could be easing of monetary policy this time. Finance Minister Arun Jaitley and Chief Economic Advisor Arvind Subramanian also expressed hope of rate cut by the RBI.

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