Mumbai: With inflation declining sharply in recent weeks and slowing demand, the Reserve Bank may signal softer interest rates even though it may not tinker much with key-rates in the quarterly review of its annual monetary policy, bankers said.
“Presently, banks have surplus funds following the liquidity infusions by the RBI. But the low-demand is causing supply-side issues to lenders. Given these factors, the RBI is unlikely to cut its rates further (in its quarterly review of annual monetary policy, slated for January 27),” IDBI Bank deputy managing director O V Bundellu said.
Prime Minister Manmohan Singh had also indicated that the falling inflation would give monetary flexibility to deal with the difficult economic environment and the RBI is widely expected to announce measures that would help the economy to push growth.
State Bank of India chairman O P Bhatt had also said that the RBI may not cut its key-rates further soon. “At the moment, I do not expect (any cuts in the RBI key-rates),” Bhatt said.
After rising to multi-year highs in mid-last year, the WPI-based inflation started declining in recent months in line with falling global crude and commodity oil prices and currently stands at 5.24%.
Indian Banks’ Association Chief Executive K Ramakrishnan agreed to this view, saying that the Central Bank is unlikely to tinker with its rates in the quarterly policy review unless demand picks up in the market.
“If they (RBI) cut rates further, that would pump in more money into the system. There is already enough liquidity in the system, but a few takers for credit. The RBI may not cut its rates further in the policy,” Ramakrishnan said.
Bankers, however, felt that the RBI may maintain a status quo in their key rates as the Central Bank has already brought down CRR and short-term rates to inject Rs 3-lakh crore liquidity into the system.
After hiking its key rates till October last year, the apex bank started slashing its cash reserve ratio, repo and reverse repo rates to support growth.
The RBI reduced its CRR to 5%, repo to 5.5% and reverse repo to 4%.
CRR is the percentage of amount banks need to park with the Central bank, repo is the rate at which the RBI lends to banks and reverse repo is the rate at which the apex bank accepts deposits from banks.
Taking a cue from the Reserve Bank’s policy measures, majority of Indian banks, including the largest public sector lender State Bank of India and private sector lender ICICI Bank, had slashed their lending and deposit rates recently to pass on the benefits to customers.