Economists bat for rate cuts to boost growth
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Economists bat for rate cuts to boost growth

Last Updated: Monday, April 08, 2013, 22:56
 
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Economists bat for rate cuts to boost growth
Mumbai: Given the steeply falling growth rate and the declining trend in headline inflation readings, economists Monday tried to impress upon the Reserve Bank to prop up growth by front-loading interest rate cuts in the annual monetary policy to be announced on May 3.

They have suggested a 25-50 basis point reduction in the short-term lending rate, one of the economists who met the RBI top brass at the customary pre-policy meeting told PTI.

Economists' views come more or less in contradiction with the bankers' view who wanted the Governor to cut CRR and not repo rate saying given the high cost of deposits a repo cut would not help them cut their lending rates.

Another economist said that some of them also favoured a reduction in both the repo and CRR rates to help boost investments.

When sought the rationale for front-loaded rate cuts, they said all the available indicators point towards a downward trend in headline inflation readings going forward. But they admitted food and retail inflation are pain-points.

The economists also said they expressed their concerns on the slowing deposit rate growth and investment amidst tight liquidity conditions.

Last week during their meeting with the RBI, bankers had sought from RBI 0.5 percent cut in their cash reserve requirement to tide over tight liquidity situation, and to help stem slide in investments.

Although there did not appear to be a clear consensus on what bankers wanted from the Reserve Bank in its monetary policy, the larger view was that it should effect a 0.50 percent cut in the Cash Reserve Ratio to ease liquidity crunch.

The CRR, which is the portion of deposits that banks keep with RBI, is 4 percent currently, after the 25 bps (0.25 percent) cut each in the January and March policies, while the short-term lending (repo) rate is at 7.5 percent, after the 0.25 percent reduction on January 29.

Some bankers had also demanded a cut in the short-term lending rate to boost credit pick-up, but the larger view was that a CRR cut would make monetary transmission faster as a mere repo cut would not help them slash their lending rates due to high cost of deposits.

All leading banks recently increased their term rates to attract deposits, the growth of which have been way below the RBI target of 15-16 percent.

"We think that there should be a CRR cut now, as the main issue is of liquidity. We expect the RBI to slash CRR by 50 bps (0.50 percent)," Bank of Baroda Chairman and Managing Director S S Mundra had said.

Banks are borrowing over Rs 1 lakh crore on an average from the RBI's overnight window everyday. In this regard the bankers had also urged RBI to conduct more open market operations to ease liquidity crunch.


PTI



First Published: Monday, April 08, 2013, 22:56


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