RBI likely to cut short-term lending rates by 0.25%: Experts

Last Updated: Friday, June 15, 2012 - 17:30

New Delhi: The Reserve Bank is likely to cut short-term lending rate by 0.25 percent in its monetary policy review to be unveiled on Monday, to boost manufacturing sector and spur economic growth, say experts.

While Morgan Stanley and Barclays expect RBI to cut repo rate by 25 basis points, Dun & Bradstreet and HSBC are of the view that the cut will not be sufficient to arrest downturn.

"Considering that core WPI inflation has remained steady and GDP growth has been slowing, we think there is a high chance that the RBI will cut the repo rate by 25 bps to 7.75 percent in the next monetary policy review on June 18," Morgan Stanley said in a report.

After expanding by 8.4 percent for two consecutive financial years, the GDP slumped to 6.5 percent in 2011-12. The country is now also grappling with high inflation, slowing industrial growth, sliding rupee and declining exports.

"A good monsoon will remain crucial in the RBI's policy calibrations, as it will have implications for both inflation and growth. In particular, headline inflation remains an issue -- with May CPI at 7.55 percent.

"Given it is coming with a softening core, it is not a major stumbling block to further RBI rate cuts. In fact, we now expect the RBI to reduce rates by 25 bps," Barclays said in its report.

However, Dun & Bradstreet said that slashing repo rate or Cash Reserve Ratio (CRR) will not be "sufficient to pull up the growth momentum of the industrial sector and the government would need to take some strong actions to boost the investor sentiment without which the recovery in growth will be delayed".

"The significant moderation in the growth of GDP recorded in FY12 has further reiterated the need to take urgent measures to bolster economic growth going forward," said Arun Singh, Senior Economist, D&B India.

RBI had cut key lending rate by 50 basis points to 8 percent after consecutively raising it 13 times since March, 2010 in its bid to tame inflation.

Also since January, the RBI has resorted to injecting liquidity into the financial system, by reducing Cash Reserve Ratio for banks. Besides, it has called for fiscal steps by the government to combat inflation.

According to HSBC, RBI may "feel compelled" to pull the trigger and cut rates again on Monday but the rate cut would be the wrong medicine to cure the growth ails; instead, a heavy dose of structural reform is needed.

"Teasing up demand would only risk generating more inflation," it added.

RBI has projected inflation to be around 6.5 percent by March, 2013, with a caution that it would remain sticky and there is a need to arrest the decline in economic growth.


First Published: Friday, June 15, 2012 - 17:30

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