India Inc expects RBI to cut interest rate by 0.50%

India Inc expects RBI to cut interest rate by 0.50% New Delhi: India Inc expects the Reserve Bank to cut interest rate by at least 0.5 percent in its annual monetary policy on May 3 to boost sagging growth which slipped to decade's low of 5 percent in 2012-13.

"...The recent deceleration in WPI inflation and fall in global commodity prices should allow the RBI to front load its rate action. We continue to expect 100 bps (1 percent) rate reduction in FY14, including 50 bps (0.5 percent) in May policy," CII Director General Chandrajit Banerjee said.

RBI Governor D Subbarao will announce the annual monetary policy for 2013-14 on May 3.

The central bank has already reduced key interest rate by 1 percent (100 bps) during the course of 2012-13 and pressure is mounting on it to further cut rates in the annual policy for the current fiscal.

Expecting a similar cut of 0.50 percent in short-term lending, or repo, rate, industry body Ficci said there has been a fall in prices of crude oil and gold recently which has helped narrow down the current account deficit (CAD) and hence provides room for a greater rate cut.

"This should provide the RBI greater room for further rate cuts. We do hope to see another 0.5 percent cut over the next quarter as indicated by respondents of several Ficci surveys conducted in recent past," President Naina Lal Kidwai said.

Ficci also expects the RBI to provide liquidity support by reducing cash reserve ratio- the portion of deposits banks need to park with RBI in cash- and open market operations.

"...There has been only a marginal cut in the CRR by 0.25 percent in the January policy to 4 percent. Banks have been advocating a further 0.5 percent cut in CRR to help tide over a difficult liquidity situation."

However, expecting a much bolder step from RBI, Assocham said it should not be difficult for RBI to cut repo rate by one percent (or 100 bps).

"Reduction of 1 percent in repo rate will be considered a bold and smart move. It should not be difficult and it would not have much impact on inflation...

"The falling deposit growth and continued diversion of household savings into gold and real estate has put pressure on liquidity in the banking system-a very valid point for reduction in CRR by at least 100 bps," Assocham said.

"The central bank must cut interest rates aggressively, or else the industry will witness more non-performing assets hitting the overall economic sentiment. Banks will also take a huge collateral damage," its President Rajkumar N Dhoot said.

Advocating a similar move, PHD Chamber said repo rate should be cut by 1 percent (100 bps) to thrust investment.

"Repo rates should be reduced by at least 100 bps (1 percent) to induce investments, while CRR by 0.50 percent to ease the liquidity situation," President Suman Jyoti Khaitan said.

The wholesale price index (WPI) based inflation fell to a three year low of 5.96 percent in March from 6.84 percent in February on falling food prices.

Ficci said despite a rate cut of 0.25 percent by RBI in January, it was not translated into a reduction of lending rates by banks as rates are only in range of 9.7-10.25 percent from 10-10.75 percent a year ago.

"...Respondents have expressed the need for reduction in interest rates by about 100 bps over the next 6 months," Ficci said.

It also said there are no definitive signs of a pick-up in economy, so steps need to be taken to boost both investment and savings.

"Bold reform measures by the government are absolutely imperative to revive the animal spirits," Kidwai said.

PTI