New Delhi: Inflation fell to a three-decade low of 0.18%, fuelling expectations that the Reserve Bank would signal cut in lending rates by banks as demanded by the industry which posted negative growth in February as well.
However, bankers feel that RBI might not go for rates cut in its 21 April monetary policy review, but some time later as liquidity is enough in the system.
“RBI is likely to cut repo and reverse repo (short term lending and borrowing) rates by 50 basis points by May-end to help banks reduce lending rates further,” Oriental Bank of Commerce executive director S C Sinha said.
Yes Bank chief economist Shubhada Rao said she believes there was room for rates cut, but it might not happen during the 21 April meeting as banks were yet to cut lending rates.
However, she said even if RBI cut key rates, it might not translate into lower lending rates immediately, as banks had already taken deposits at high rates.
In fact, RBI Governor D Subbarao had expressed surprise as to why banks were not cutting lending rates adequately in response to reduction in key rates by RBI.
“Being a monetary authority, RBI cut policy rates, which should have been transmitted to lending rates by banks. Policy rates have to be transmitted to lending rates by banks... We are talking to banks to understand what their perception is,” he had said adding interest rates should come down for India to become competitive.
Shubhada Rao said, “There is surfeit of liquidity in the economy. We need rates cut to spur demand. The cost of funds are still relatively high and they are expected to come down by August-September.”
She said in the entire fiscal, 50-100 basis points cut in rates by RBI was expected.
However, food prices are still high even as inflation came down to 0.18%, with vegetables prices soaring by around 25% and other edible items also turning dearer.
Citigroup Global Markets said there was a possibility that RBI may wait to see the impact its earlier filter into the economy, and the central bank might highlight that the Consumer Price Index was still near double-digit levels.
Nagesh Kumar, director-general with the economic research institution RIS, said, “Low inflation provides room for rate cuts and the RBI should and would certainly cut rates, which is healthy for revival.”
Industry demanded cut in lending rates as factory output contracted again in February by 1.2%.
Crisil principal economist D K Joshi said, “RBI will cut rates anyway to prop up growth. Rate cut is certain and it will happen in the (21 April) policy.”
Prime Minister Manmohan Singh recently informed industry leaders that he has asked RBI to look into the issue of high interest rates coming in the way of reviving economic growth, industry chambers said.
“The Prime Minister said he has requested RBI to look into high interest rates,” Ficci president Harsh Pati Singhania told reporters after a meeting was convened to take views of industry captains on the state of the economy.
The industry is concerned over prime lending rates ruling well above 10% even when inflation has reached near-zero level.