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Patel may cut rate by 0.25% in policy review on Wednesday

Monday, December 05, 2016

Reserve Bank Governor Urjit Patel is expected to again go in for a 0.25% interest rate cut at its next policy review on Wednesday, with an aim to cushion the impact of demonetisation, a majority bankers feel. This will be the first monetary policy review after demonetisation of old Rs 500 and Rs 1,000 currency notes following which banks witnessed surge in deposits.

Patel, in his first policy as RBI Governor, in October reduced the repo rate (short term lending rate) by 0.25% to 6.25%. This will be the second policy which will be based on recommendations of the Monetary Policy Committee. RBI has cut repo by 1.75% since January 2015.

Canara Bank MD and CEO Rakesh Sharma said that with softening of inflation, "We expect that RBI may go for a 25-basis point rate cut in the upcoming policy". Echoing similar views, IDBI Bank CFO R K Bansal said the central bank would ease the repo rate to 6%.

"The new two quarters are very important and they would like to see the impact of demonetisation," Bansal said. Bankers opined that with the increase in Market  Stabilisation Scheme (MSS) ceiling to Rs 6 lakh crore from Rs 30,000 crore, RBI is unlikely to continue to apply the incremental cash reserve ratio.

According to SBI, there is an expectation that the inflation in November will be below 4%. In October, retail inflation was at 4.20% while wholesale inflation eased to 3.39%. "Also, the recent demonetisation will support easing inflation by affecting consumer demand adversely. Hence, we are still expecting another round of repo rate cut by 25-50 basis points (0.25-0.50%) in 2016-17," a senior SBI official said.

The Citi, in its report, has said RBI may revise its 2016-17 GDP growth forecast substantially from 7.6% earlier and cut repo rate by 25 bps repo to arrest the downside risks to growth. Industry chamber PHDCCI feels that as the process of demonetisation has created tremendous liquidity, at this juncture, "RBI should cut repo rate in line with cut in deposit rates" in the policy.

"Industry, businesses and people are facing the impact of higher interest rates for the last many years," said PHD Chamber of Commerce and Industry President Gopal Jiwarajka. HSBC, in a report, said expectations of lower growth and inflation solidify its 25 bps rate cut call for the current fiscal year.

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