RBI unlikely to cut key policy rates on Dec 18, reduction in CRR likely

The Reserve Bank of India (RBI) is likely to leave key policy rates unchanged at its mid-quarter monetary policy review next week, but will go for 0.25 per cent CRR (cash reserve ratio) rate cut to support growth, Bank of America Merrill Lynch said in a research report.

RBI will go for a 0.25 per cent cut in CRR, which is the portion of bank deposits parked with the central bank, on its December 18 policy review to support growth and will resume cutting rates only from January once inflation peaks off, it said.

“We expect RBI to resume cutting rates only from January — 75 basis points (0.75 per cent) till July — once inflation peaks off,” the report said, adding that RBI rate cuts will not transmit into lending rate cuts unless the liquidity situation improves.

Over the past three months, RBI has reduced CRR, the portion of deposits banks are required to keep with the central bank, by 0.50 per cent to 8 per cent. But these cuts did not lead to an easing of overnight rates.

Though, RBI has finally decided to resume open market operations (OMOs) to ease liquidity, BofA ML said that governor Subbarao may not want to take chances with RBI’s inflation fighting image by cutting rates at 7.5 per cent inflation.

“India is the only Bric where lending rates are almost at their 2008 peak,” the report said.

India had been growing around 8-9 per cent before the global financial meltdown in 2008. The growth rate in 2011-12 slipped to a nine-year low of 6.5 per cent. According to the official data, the Indian economy grew by 5.3 per cent in the July-September period this year, while in the quarter ended June 30, the economy grew by 5.5 per cent.

Inflation as measured by all indices has remained elevated and wholesale price index-based inflation has remained above RBI’s comfort zone of 5-5.5 per cent for nearly three years now.

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