Raghuram Rajan Seen Holding Repo Rate, But Expected to Act to Bring Down EMIs

NDTV Profit Desk

07 Apr 2015, 10:21 AM IST

File Photo: RBI Governor Raghuram Rajan

Reserve Bank Governor Raghuram Rajan is expected to hold repo rate unchanged at 7.50 per cent in his monetary policy announcement at 11 a.m. on Tuesday. Status quo on interest rates is anticipated because Dr Rajan has already cut repo rate twice this year, both times outside the policy meetings, surprising markets.

However, there's speculation that the RBI may slash CRR, or the cash reserve ratio, in a bid to push banks to lower lending rates. India's biggest lenders such as state-run SBI and private sector lender ICICI Bank have not lowered lending rates despite back-to-back repo cuts this year.

A cut in CRR, which is the portion of deposits that lenders must keep with the RBI, will boost banks' lending capacity, helping them to lower lending rates for home and auto loans, a move that will drive consumer demand and help the economy. CRR has been on hold at 4 per cent since early 2013.

"A 50-basis point cut in CRR will release Rs 45,700 crore into the system. The opportunity gain for the banks (assuming no change in repo rate at 7.5 per cent) for such release is Rs. 3,500 crores (annualized)," said Dr. Soumya Kanti Ghosh, chief economic adviser at SBI.

The pressure on Dr Rajan to cut CRR is also coming from India Inc. According to a survey by industry lobby Ficci, reductions in repo rate has not been adequate to stimulate investment in the manufacturing sector.

"Interest rates or cost of finance continues to be sticky. Interest rate paid by the manufacturers ranges from 9.5 to 14.75 per cent as per the survey with average interest rate at around 12.2 per cent per annum. 69 per cent respondents do not foresee any substantial increase in investments by their organization as a result of reduction in repo rates by RBI," Ficci said in a statement.

Market participants are hopeful of a CRR cut because crude oil prices continue to stay subdued, keeping a lid on consumer price or retail inflation. Retail prices rose 5.37 per cent in February, marking a fifth consecutive month of staying within the RBI's target of 2 to 6 per cent.

However, earlier-than-expected rainfall in parts of the country has pushed up prices of winter crops, such as wheat and pulses, which could make the RBI cautious over the outlook for inflation.