MUMBAI: The Reserve Bank of India may sweeten its expected 25 basis point
interest rate
cut on Friday with a similar reduction in the cash reserve ratio to
ease tight market liquidity conditions as increasingly benign inflation
gives it room to manoeuvre.
A slowdown in inflation, economic
growth languishing at a decade-low 5 per cent and expectations of a
lower current account deficit thanks to cooling global commodity prices
have also spurred expectations for less hawkish guidance from RBI
Governor
Duvvuri Subbarao.
The majority view remains for the RBI to leave the cash reserve ratio
unchanged at 4 per cent, the lowest since 1976, but some in the market
said it may spring a surprise to prod banks to pass along interest rate
cuts.
"Liquidity conditions have still not improved and so the RBI can do a surprise
CRR
cut to be a bit more forceful on banks to ensure transmission," said
Abheek Barua, chief economist at HDFC Bank, who still expects the RBI to
keep the CRR on hold.
The RBI's monetary transmission -- the
impact of its rate moves on the economy -- has been hamstrung by tight
funds in the banking system, which has kept banks' cost of deposits high
and prevented them from cutting lending rates.
Credit growth
at banks touched a more-than three-year low of 13.9 per cent in early
April as companies shelved project plans, consumers refrained from big
purchases and lenders were wary of rising bad loans in a slowing
economic cycle.
The country's current account deficit touched a record-high 6.7 per cent of
GDP in the December quarter, prompting Subbarao to warn in March that there was "quite little" room for further policy easing.
However, the current account deficit is likely to ease to about 4.4 per
cent in the March quarter on higher exports and easing
gold imports, according to a Reuters poll, still well above the long-term average of 1.5 per cent but headed in the right direction.
Finance Minister
P. Chidambaram defied expectations by cutting the country's
fiscal deficit
to 5.1 per cent of GDP in the just-ended fiscal year, and aims to lower
that to 4.8 per cent in the current year, also giving the RBI room for
easing.
"The second-order impact of a lower fiscal deficit will
create room for more savings, help in bringing down inflation and in
turn reduce demand for imported gold and cool off current account
deficit. This will give the RBI some space to sound neutral to hawkish
in its rhetoric," said Rahul Bajoria, regional economist at
Barclays Capital.
Headline inflation fell to its lowest in more than three years to 5.96
per cent in March, below the RBI's own 6.8 per cent projection, thanks
to slow manufacturing inflation.
A Reuters poll last week
showed that while 37 of 42 economists expect a repo rate cut of 25 basis
points to 7.25 per cent, the lowest since 2011, only 12 expected the
RBI to cut the CRR.
While the RBI cut the repo rate by a
combined 100 basis points in the fiscal year that ended in March, most
banks have lowered their base lending rates by just 25 basis points,
which has exacerbated sluggish growth.
However, while commodity
prices have been softening globally, consumer price inflation remains
in double digits, a key reason the RBI should not ease up its
anti-inflation guard, some economists said.
Samiran Chakrabarty, chief economist at
Standard Chartered Bank, said easing inflation might reverse in the second half of the fiscal year.
"The softening trend might be over as better growth will push up
demand-side pressure and global commodity prices may also rise," he
said.
