With moderation in economy and core inflation, pressure is mounting on Reserve Bank to cut interest rate by up to 0.50 per cent and address liquidity concerns to boost growth.
While the Finance Minister P Chidambaram expressed hope that RBI would address liquidity issues at its mid-quarterly review on Tuesday, SBI Chairman Pratip Chaudhuri said a 0.50 per cent interest rate cut is needed.
“I think Governor is also aware of the issues about liquidity and tomorrow is the monetary policy. I am sure he will address the issue of liquidity,” Chidambaram said after meeting the chiefs of PSU banks here.
The Minister said many PSU banks are having SlR in excess of statutory requirement of 23 per cent and earning interest on them rather than lending to corporates.
Chaudhuri said: “We have requested 50 basis points in CRR and 0.50 per cent cut in Repo. We have also requested to increase the export credit refinance which is currently 50 per cent of the rupee credit. We have requested them to increase it to 100 per cent”.
Reflecting tight liquidity situation, banks today borrowed `1.42 lakh crore from RBI under the repo window.
“SBI liquidity is comfortable. We are sitting currently on `30,000-40,000 crore and the government is also disbursing capital. So that improves liquidity,” Chaudhuri said.
Core or manufactured inflation came down to 3.8 per cent in February, the lowest in 35 months. However, overall WPI inflation remained high at 6.84 per cent on mainly on account of high food prices.
While the January factory output numbers have showed signs of improvement, growing at 2.64 per cent, the economy is estimated to have grown at a decade’s low of 5 per cent in the current fiscal.
In the run-up to the RBI policy, policymakers includingthe PMEAC chairman and former RBI Governor C Rangarajan, and the chief economic advisor Raghuram Rajan, had opined that RBI should go for an interest rate cut.
Finance Minister P Chidambaram has resolved to rein-in the fiscal deficit at the targeted 4.8 per cent in 2013-14 fiscal, from 5.2 per cent in the current fiscal.
Subbarao had last week appreciated government’s fiscal management decision, but had also said RBI would do everything possible it bring down inflation to 4-6 per cent.
According to experts, the slowdown in deposit growth and the liquidity shortage are preventing banks from passing the recent rate cuts by the RBI to customers.
Governor Subbarao had surprised all by opting to cut the key repo rate, at which it lends to the system, by 0.25 per cent in the January policy announcement and coupling it with a cut in the cash reserve ratio of a similar measure to infuse the additional liquidity.
The transmission to actual cuts in lending rates by banks has not been done in full measure as banks complain about the lack of change in their cost of funds due to difficulties in deposit mobilisation.
If the rate cut comes through, this will be the third rate cut during the fiscal. Subbarao had gone in for a 0.50 per cent cut in the repo rate in the annual policy announcement of April.
Rating agency Crisil said a fall in core inflation will help RBI ease policy rates on Tuesday and it expects a 0.25 per cent cut in the repo rate.
Similarly, economists at foreign investment banks like HSBC, Credit Suisse and Barclays, among others, have also said they expect a 25 bps reduction in the repo rate as the focus should now move to boost growth amid some comfort on the inflation outlook front. PTI