There are different opinions as to whether Reserve Bank of India (RBI) will cut rates when it unveils the last monetary policy of the financial year on February 8.  The economists on one hand add that the central bank will hold and let liquidity take care of the rates, however, others feels, RBI may cut rates attributing the cut to the lower food prices and the pause signalled by the US Federal Reserve.

Bankers say they have taken the cues and reduced lending rates to shoot up growth, and now it is the turn of RBI to signal lower rates by trimming the repo rate, or the rate at which it lends to banks.   The SBI chief says that SBI is now ahead of the cycle. They add that they have cut rates by 2% as compared to the 1.75% cut by RBI and hence a repo rate cut is expected. However, the economic research department of SBI says there will be a break.  Further,

  • The gradual rise in oil and food prices is another factor worrying many economists.
  • Axis Bank Economist feels that they expect no change, as RBI will want to see the movement of the oil prices and food prices in the coming months. Last year the food prices were down due to the demonetization impact. Now with all those external factors waning off, the food prices are likely to reverse.”
  • There are also opinions that this may be the last chance for RBI to act so it may cut the rate. Lower food prices in November and December give them hope for a 0.25% cut in interest.
  • The head of Standard Chartered Bank, feels that RBI may cut rates by 0.25% on February 8 and possibly this could be the close of end of the rate-cut cycle since, Interest rate differentials have already narrowed and cannot go down further.
  • One more thing to add is that the consumer price inflation coming down both in November and December has improved chances of RBI meeting the 5% target in March 2017.
  • Another officials says that the daily food price tracker and price trend of other key items seems to suggest that CPI inflation for the month of January will ease further to 3.2%, with core CPI (excluding food, fuel and transport) remaining steady at 5.1%. Even after the base effect turns negative from February, CPI inflation will likely rise to 4.5-4.6% by March 2017, which should provide the central bank adequate comfort.
  • The chances of banks reducing the rates further by banks is not foreseen, without a push from the central bank as the increase in deposits of the banking system is slowing, as depositors withdraw their money and credit growth continues to be subdued.
  • According to RBI data until February 3, the deposits of banks had risen Rs 12.7 lakh crore, or 13.9%, over last year to Rs 105 lakh crore against a 10% rise reported last year, while the credit growth has remained stable at 5% with the total outstanding bank credit standing at Rs 74 lakh crore.
  • But as long as the cash restriction remain, RBI may also think it is worth playing safe by keeping the liquidity surplus for lower lending rates, something which the central bank has been undertaking for the past few months.

Let the monetary policy committee meeting decide as to what is to be done??

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