Firming Food Prices May Prompt RBI to Maintain Status Quo

New Delhi: The Reserve Bank of India (RBI) is unlikely to lower the interest rates during its annual monetary policy review on Tuesday due to increased food prices after unseasonable rains in various parts of the country, bankers and experts said.

However, the RBI may indicate a rate cut in future after some improvement on the price front, they added.

State-run Union Bank's chairman and managing director, Arun Tiwari, said it is "highly unlikely" that the RBI would further ease its monetary policy on April 7, given the current price situation, as they have already done so twice in quick succession.

The RBI had lowered its policy rate by 25 basis points to 7.5 per cent on March 4, after a similar cut on January 15, on the back of softening inflation and the government's commitment to continue with the fiscal consolidation programme. Both the rate cuts were announced outside the RBI's regular policy review.

State Bank of India chairperson Arundhati Bhattacharya said she would rather want the apex bank to cut cash reserve ratio (CRR) so that the cost of fund can come down and the bank can pass on the same to the borrowers.

She said such a move would also help in an effective transmission of monetary policy action.

Asked if statutory liquidity ratio (SLR) would help in cutting rate, Ms Bhattacharya said, "May be reduced. But Liquidity Coverage Ratio (LCR) requirements will need us to invest in G-Secs. So SLR cut does not help much right now."

Indian Banks' Association chairman T M Bhasin, who is also CMD of Indian Bank, said, "We are expecting a cut in CRR so that banks can reduce lending rate."

Mr Bhasin said that a cut in repo rate at this point would not help banks lower their interest rates, as they are not borrowing much. The credit offtake is low and is expected to remain so in the first quarter of 2015-15, he added.

Bank credit grew 9.5 per cent in the fortnight ended March 20 - the lowest growth in last two decades.

CRR, the portion of total deposit parked with the RBI, currently stands at 4 per cent.

HDFC Bank's principal economist Jyotinder Kaur said the unseasonal rainfall in recent weeks across the northern and central regions of the country has had an adverse impact on key rabi (winter) crops such as wheat, oilseeds and pulses. As per an Assocham study, the damage could be at least 25-30 per cent to the crop yields.

The rains have sparked expectations that the RBI might wait till the full impact of the weather disturbance becomes evident and keep the key policy rates unchanged at the forthcoming review on April 7, Ms Kaur said.

She, however, added that the case for a rate cut, sooner rather later, still remains.

"The governor (Raghuram Rajan) could cut the repo rate by another 0.25 per cent at the review, failing which, a rate cut is likely later in April, most likely after the retail inflation figure for March is out in the second week of April," she said.

The RBI may lower the rate by another 0.25 per cent next week or could wait for some time and then may effect some rate cut out of policy, said Sudhir Agrawal, fund manager at UTI Mutual Fund.

Credit growth is low and there is need for boosting the credit, he said.