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Economy Jul 31, 2012

Scope to cut rates this year depends on policy reforms

By Firstbiz Staff

The Reserve Bank of India has scope to cut interest rates during this calendar year, Governor Duvvuri Subbarao said in a news conference after the central bank's policy review, though he declined to elaborate further.

Subbarao said fiscal measures from the government would not necessarily prompt the central bank to take monetary policy action.

Earlier today, the RBI left key policy rates unchanged, citing persistent inflationary pressures. However, the Statutory Liquidity Ratio (SLR) -- the amount of deposits banks park in government bonds -- was reduced by one percent to 23 percent. But it has come as a welcome surprise to the banks. Not that it'll impact the lending or the deposit rates but the impact on margins is likely to be positive because of the impact on asset pricing, Said Esprito Santo Securities Research today.

The brokerage feels more leeway to cut rates should arise post October, depending on "government taking essential steps towards fiscal consolidation, food prices revert somewhat and more importantly the transmission of food inflation to generalized inflation staying limited given weak industry demand and falling pricing power."

Given the stance adopted, Care Ratings too doesn't expect any change in policy rates in the second quarter of the current financial year as monetary easing would be governed by inflation dynamics rather than growth. " A50 bps reduction may be expected during the H2 FY13 provided inflation moves down," it said.

RBI

Nomura economist Sonal Varma told CNBC-TV18 that interest rates will not come in until inflation expectations clearly subside."Our view is that the first hurdle of the next 25-50 bps rate cut may be met somewhere in the second half of fiscal year, but the big hurdle as of now, there is no visibility on when we will see the big cuts,"she said.

According to Jahangir Aziz, chief economist at JP Morgan, the governor has put the onus on the central government. "The multiple hindrances or multiple bottlenecks to supply side of the economy and to address the twin deficits, which I am guessing is euphemism for bringing down the fiscal deficit or at least containing it close to the budgetary level of 5.1%. It means a hike in diesel prices and it means FDI in retail, because that's the only government solution that's floating around about how to ease supply constraints," he said.

If the government delivers on these two, then Aziz said, the Reserve Bank will cut rates.

Meanwhile, the Planning Commission today said that RBI has taken a cautious stance due to sticky inflation in its quarterly review of monetary policy by keeping the key rates unchanged.

"As far as looking ahead is concerned, the RBI has taken a slightly cautious stance because of its concerns that inflation is sticky. I have no difficulty with that," Commission's Deputy Chairman Montek Singh Ahluwalia told reporters.

"They (RBI) are looking (at a situation) that if the Monsoon does not improve, then there may be some pressure on that (inflation) front. There is no harm (in) being little cautious on this," he added.

With inputs from Agencies

by Firstbiz Staff

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