Mumbai: The Reserve Bank is widely expected to cut its key short-term rates, repo and reverse repo, “very soon” after the second fiscal stimulus package by the union government.
With the WPI-inflation receding to 10-month low at 6.38% and is expected to continue the pace in the weeks ahead, the apex bank has more room to cut its signalling rates -- repo and reverse repo -- by up to 1%.
Prime Minister’s Economic Advisory Council chairman Suresh Tendulkar had said, “Given the prevailing conducive atmosphere, the apex bank has headroom to bring down the repo and reverse repo rates by up to 1%.”
“It is desirable to cut repo and reverse repo rates by 100 basis points,” Tendulkar added.
If the RBI further reduces the key-rates, it will help banks to bring down their cost of funds further, ensuring a soft interest rate regime in the New Year.
Echoing Tendulkar’s assessment of the situation, a senior official with a leading private sector bank said, “Considering a sharp decline in the inflation rate, the improving liquidity conditions and the focus of policy makers to support the growth of economy, the Reserve Bank has scope for a reduction in the signalling rates in the near term.”
Central bank governor D. Subbarao has cut the key rates in several departments ever since he took charge in October. The cash reserve ratio, the percentage of amount banks need to park with the central bank, was reduced to 5.5%.
The RBI slashed the repo rate, rate at which it lends to banks, and reverse repo rate, at which it accepts deposits from banks, to 6.5% and 5%, respectively.
Citi Bank’s chief financial officer Abhijit Sen also said that there was a possibility of further reduction in RBI’s key rates following the decline in inflation.