Market participants mount pressure on RBI to cut rates

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Emboldened by a decline in inflation and a sharp drop in industrial growth, bankers and market participants on Thursday mounted pressure on the Reserve Bank of India (RBI) to ease policy rates to revive growth. The central bank is due to unveil the third quarter money policy review on January 28.

In a customary pre-policy meet that RBI holds with various stakeholders, bankers and other market participants said the falling inflation called for cheaper credit and it was time RBI shifted gear from inflation fight to growth push.

Wholesale price inflation for December cooled to a five-month low of 6.16 per cent, which was below market expectation of 7 per cent, government data released on Wedn­esday showed. Bankers said RBI could now afford to turn its focus on growth.

Thursday’s meeting at RBI’s Mumbai headquarters was attended by all four deputy governors and representatives from Foreign Exchange Dealers of India (Fedai), Fixed Income Money Market and Derivatives Association (Fimda) and Primary Dealers Association of India (PDAI).

Money market players, represented by Fimda, urged RBI to increase the repo window limit to 0.75 to 1 per cent of the total deposits in the banking system, so that banks can borrow more money and liquidity can improve in the banking system.

RBI had curtailed overnight borrowing through the repo window to just 0.5 per cent of the total deposits of the banking system in a bid to reduce rupee volatility after the currency went into a tailspin in July-August when a signal from the US Fed to taper its quantitative easing programme triggered selloff by foreign investors.

RBI has two windows through which it lends money to the banks; the repo window allows banks to borrow overnight money by pledging government securities at 7.75 per cent, and the marginal standing facility, the more expensive window, facilitates borrowing of overnight money at 8.75 per cent if a bank falls short of government securities.

Money market rates should ideally hover around the repo rate, but they are now hovering near the MSF rate thanks to tight liquidity.

A banker who attended the meet said, “Since repo rate is the signalling rate, money market rates should hover around the repo rate. For this, the repo rate should be cut further so that it becomes the operational rate.” Even on Thursday liquidity was tight in the banking system, with banks borrowing Rs 41,144 crore from RBI. Call money rates were in the 8.60 to 8.85 per cent range. Yields on government securities cooled by 4 to 5 basis points after reports that the finance ministry expected to end the financial year with a fiscal deficit of 4.6 per cent of GDP, which is below the 4.8 per cent target.

Economists, however, believe RBI may hold the rates on January 28 and would embark on rate cuts only when it is confident that the inflation is on a downward trajectory.

Soumya Kanti Ghosh, chief economic adviser at the economic research department of State Bank of India, said latest updates suggest the WPI inflation might settle around 6 per cent and CPI inflation around 9 per cent by February.

“CPI inflation below 9 per cent is a possibility, if the WPI inflation contracts at a faster pace as we draw closer to the election season. An overall assessment, therefore, suggests that a rate cut is likely only in the next financial year,” Ghosh said in a report.

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