New Delhi: Borrowers hoping for a cut in interest rates following a fall in inflation will have to wait a little longer as the RBI is unlikely to reduce benchmark rates in view of excess liquidity in the system, bankers said.
In fact, interest rates are expected to remain static in the near future since low inflation and high liquidity are putting divergent pressures on the central bank whether to ease money supply or tighten it, they said.
“At this point of time, there is no need for cut in interest rates as liquidity situation is comfortable,” Punjab National Bank executive director K Raghuraman told PTI.
The rates would remain unchanged in the short term and there was little possibility of easing other measure of monetary tightening like cash reserve ratio, he said.
Although inflation is at its lowest in eight months and closer to RBI’s target, the market is flooded with cash. So much so, the call money rate at which banks take overnight loans from each other ruled at below 1% at 0.34% at the closing of the markets during the week.
Inflation came down to an eight-month low of 4.85% for the week ended 26 May as food products turned cheaper. RBI hopes to maintain inflation at close to 5% for this fiscal and 4-4.5% in the medium term.
Bankers said excess liquidity was a temporary phenomenon. A lot of cash would be drained out as the last date (15 June) of payment of first quarterly advance taxes approaches and many big public issues like DLF and ICICI Bank hit the market to raise a total of Rs20,000 crore. Also, credit offtake would pick up after June, they said.
“Excess liquidity would go away with the RBI bond auctions and advance tax payments,” Oriental Bank of Commerce executive director Allen C A Pereira said.