Reserve Bank may cut rate by 25 bps

With most of the conditions set by the Reserve Bank of India Governor Raghuram Rajan for further easing of the monetary policy met, market participants said the stage is set for at least a 25 bps reduction in interest rate in the first bi-monthly review of monetary policy scheduled on April 5.

“Given that the general budget stayed on the path of fiscal consolidation and progress has been made on the reforms front, the pre-conditions for further monetary easing are met. The case for a rate cut becomes even stronger considering the benign CPI trends and a strengthened transmission mechanism,” economists at the Citigroup said in a report titled “All boxes checked for a rate cut”. Citi expects repo rate reduction of 25 bps during the policy review and said RBI will leave the window open for further easing.

Retail inflation for February grew by 5.18 per cent, the slowest in four months due to lower food inflation. In the budget, the government showed resolve in adhering to the fiscal consolidation path by keeping the fiscal deficit target for 2016-17 at 3.5 per cent.

The central bank has reduced interest rate by 125 bps to 6.75 per cent since January 2015. However, it kept interest rate unchanged in the last two monetary policy reviews.

There is a section of market which is betting for more than 25 bps rate cut.

Bankers are also expecting the central bank will revise the liquidity framework to address structural issues in liquidity management. Liquidity deficit in the banking system was over Rs.2 lakh crore in March, mainly due to lack of government spending which jacked up the short term rates.

SBI — the country’s largest lender — had demanded that the government’s cash balances to be kept with the lenders, and not with the Reserve Bank of India, which will give more flexibility to banks for managing their liquidity.

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Source:Thehindu

RBI