Mumbai, 7 September The Reserve Bank of India is likely to reverse its monetary tightening bias and cut the cash reserve ratio (CRR) this year, as inflation remains within target levels, spurring banks to pare lending rates, JP Morgan said in a note.
Data showed India’s inflation rate hit 3.79%, a 16-month low, and could ease further in coming months, well within the central bank’s 5% comfort zone for the financial year ending March.
“Given our outlook for WPI (wholesale price inflation) to remain below the RBI’s (Reserve Bank of India) comfort level of 5%, there is scope for policy to shift gears later in the year,” said JP Morgan.
The increased possibility of an early general election, and resulting political compulsions, also raises the possibility of monetary easing, it added.
Bank’s reserve requirements have been raised by 200 basis points since December, most recently last month, in a bid to tame price pressures, and tighten easy cash conditions.
The hikes in the CRR are reflected in the average nominal prime lending rate, that has increased 225 basis points in the current tightening cycle, despite the key policy rates, the repo and reverse repo rates, being raised by only 175 bps and 150 bps respectively.
“Lending rates thus capture the impact of of higher policy rates and hikes in CRR.”
With inflation trending lower, the central bank is likely to reduce the CRR, which should precipitate lower bank lending rates, said JP Morgan.
“One of the key lessons from the mid-1990s tightening experience was that real interest rates should not remain high for longer than needed,” the New York-based investment bank said. REUTERS