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Rediff.com  » Business » Rate cut may have to wait until Jan

Rate cut may have to wait until Jan

December 17, 2012 10:10 IST

RBIThe Wholesale Price Index-based inflation may have eased to its weakest in 10 months in November but the Reserve Bank of India is not expected to cut repo rate, the key policy rate -- at which banks borrow from RBI -- in its mid-quarter review of the monetary policy on Tuesday.

A cut in the interest rate is expected only next month, when the central bank meets for the third-quarter review of its policy on January 29.

Analysts said there was chance of a cut in the cash reserve ratio by a further 25 basis points to infuse liquidity into the system, as borrowings by banks under RBI's daily Liquidity Adjustment Facility continued to be above the central bank's comfort zone of +/- one per cent of banks' net demand and time liabilities.

CRR -- the proportion of total deposits a bank has to keep with RBI as cash -- is at 4.25 per cent of banks' NDTL currently.

At the start of 2012, it had stood at six per cent and it was brought down to the current level in four tranches.

"Headline inflation eased unexpectedly, led by fuel and core inflation. This should provide RBI some comfort.

"However, this will not be enough to trigger a rate cut on December 18, although RBI will likely cut CRR again and signal the potential for rate cuts early next year," Leif Eskesen and Prithviraj Srinivas of HSBC said in a report.

In November, WPI rose 7.24 per cent from a year earlier, compared with 7.45 per cent in October.

Banks borrowed Rs 1,29,385 crore (Rs 1,293.85 billion) under RBI's LAF on Friday.

However, the high borrowing was also because of the advance tax outflows draining about Rs 50,000-60,000 crore (Rs 500-600 billion) liquidity out of the system.

RBI has this month conducted two Open-Market Operations in purchasing gilts to comfort the liquidity and has infused Rs 23,246 crore (Rs 232.46 billion) by the way of OMOs in December so far.

"A repo rate cut next week still looks unlikely, though a 25-basis-point CRR cut to address the persistently tight liquidity in the inter-bank market is likely," said Richard Iley of BNP Paribas in a report.

The repo rate currently stands at eight per cent.

It was cut only once in the current financial year -- by 50 basis points in April.

But the softening inflation rate is certainly seen as a basis for rate cuts going forward.

"Friday's inflation print increases the pressure on RBI to bring the rate cuts forward," said Barclays' Siddhartha Sanyal and Rahul Bajoria.

Economists also agree RBI is willing to boost the dismal growth of the economy.

"We do see RBI keen to begin playing its part in supporting the economy, especially with a range of fiscal and investment-friendly reforms being undertaken by the Centre," said Deutsche Bank's Taimur Baig and Kaushik Das.

Neelasri Barman in Mumbai
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