Reserve Bank of India Likely to Reduce Rates

By Dr Suvrokamal Dutta

With inflation hovering in the region of 4-4.5 per cent, it has come into the notice of The India Street that there is a consensus among bankers that Reserve Bank of India (RBI) would ease up on tightening monetary policy. As a matter of fact, ICICI Bank CEO K.V. Kamath had expected rates to soften.

Interestingly, RBIs quarterly review of monetary policy announced on July 31, left the key Bank Rate and repo rates unchanged, but once again increased the cash reserve ratio (CRR) by another 50 basis points to 7 per cent and erased the Rs 3,000-crore cap on daily reverse repos under RBIs liquidity adjustment facility.

Taking a closer look at the RBI development for the last one-year or so this is the fourth time in eight months that the RBI has raised the CRR, in all by 200 basis points. The main aim, it says, is to maintain appropriate liquidity. If experts are to be believed, the latest increase will drain Rs 16,000 crore out of the banking system.

You may ask: What will be the fallout of RBIs measures this time? The good news is that the CRR hike is unlikely to translate into higher interest rates. In terms of statistic, there is an estimated Rs 40,000-crore excess liquidity in the system. Taking this into account, I have no doubt in my mind that it will certainly put an end to the banking sectors plans of minimizing lending rates as few banks had already started to do.

Few banks such as Bank of India and Bank of Baroda have already minimized their rates on one-year deposits by 50 basis points to 9 per cent. In my opinion, for the middle class of India, which has already been hit by the steady increase in interest rates on home and consumer loans over the last year, this is a double whammy. First and foremost, the CRR hike almost certainly rules out any immediate softening of interest rates. In addition, they will get lower returns on their bank deposits.

”The Reserve Bank of India is keen on ensuring that excess liquidity in the banking system does not push the inflation rate upwards once again,” pointed out Devendra Barua, economist based at India. According to sources, RBI is likely to intervene actively in the forex market in the coming days to keep the rupee stable at 40-40.50 levels to give some respite to exporters.

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