RBI likely to cut CRR to ease liquidity pressure, but hold rates till March

Reserve Bank of India Governor Duvvuri Subbarao, known to overrule majority opinion, could spring a surprise with a cut in the cash reserve ratio (CRR) to ease liquidity pressure on the system, which may also reduce funding costs for industry.

"The open market operations (OMO) have been an instrument of first preference for the purpose (easing liquidity pressure), but additional instruments could be considered as and when required," said the quarterly Macroeconomic and Monetary Developments Review of the RBI that lays the foundation for the governor's monetary review. OMO refers to purchase of government bonds from investors that raises cash in the financial system.

The cash reserve ratio, the proportion of deposits that banks have to hold with the RBI, is a popular instrument to inject cash into the system. It is at 6%. Banks are borrowing more than Rs 1.2 lakh crore from the RBI, which is double of what the central bank has said it is comfortable with. Few are expecting a cut in repo rate, the rate at which the RBI lends to banks, which is at 8.5%.

"While our earlier expectations were that the RBI would begin the repo rate cutting cycle in January, the stickiness of core inflation in the December WPI print has meant that the RBI will likely postpone the first rate cut to March," says Tushar Poddar at Goldman Sachs. "We put the probability of a 25-basis-point CRR cut at 60%, with a chance that the RBI may opt for 50 basis points." A basis point is 0.01 percentage point.

The commencement of interest rate cuts may take longer despite slowing growth, as the two-year-low inflation number may be short-lived due to fiscal profligacy, widening of welfare schemes, and a weak currency.

"With inflation projected to decline in Q4 and monetary rate cycle peaking, a revival of business optimism could occur, especially if fiscal imbalances are contained so as to provide more room on monetary side," said the review.

Governor Duvvuri Subbarao will present his decision at 11 am on Tuesday. The second round impact through input costs and the lagged pass-through of the first round may sustain and even amplify the price pressures in the next few months," it said, referring to the possible impact of the currency depreciation last year. "Given that imported goods account for 22% of GDP, the inflationary impact could be significant."

Calls for interest rate cuts are getting louder after the fiscal second quarter economic growth fell to 6.9% and inflation fell to 7.5% in December from an average of more than 9% for nearly two years. But the fall in inflation could be deceptive since prices of key petroleum products and many other fuels such as coal are subsidized, suppressing actual inflation. With property prices still rising and demand for many commodities remaining inelastic, price rise could return to haunt.

Hi kartik, how is sterlite looking for intra day?

Hi Kartik, good morning sir g
Hi ARCHANA, gud morning ,how are u ?

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Hi CB/Kartik,

If RBI doesn't make any rate cut including the CRR, can banks be looked at with a shorting opportunity(esp ICICI and SBI)? They are already in the overbought region. Please suggest.