The Reserve Bank of India (RBI) is expected to further cut policy rates when it announces its monetary policy for the year 2009-10 on Tuesday. Most indicators suggest further easing is essential, with the RBI strongly urging banks to pass on the benefits of lower interest rates to all borrowers.
Among the reasons for the RBI to cut repo and reverse repo rates is a deceleration in loan growth to 7.8 per cent against the central bank's target of 24 per cent for 2008-09.
Inflation is likely to average around 2 per cent in 2009/10, giving the RBI elbow room to cut rates. Interest rates in much of the developed world is close to zero or already there. Above all, the significant increase in government borrowing also makes a case for lower rates.
“While our base case is that of an additional 100 basis points (one percentage point) easing in the coming months, measures in the recent past by both the RBI and Ministry of Finance indicate that actions will likely be taken on an ‘as and when’
needed basis rather than at specified dates,” said Rohini Malkani, economist at Citigroup.
Banks, flush with cash, have been depositing money with the RBI at 3.5 per cent as they prefer not to lend.
"Admittedly the danger for the central bank is that any rate reduction is labelled as overtly political now the general election is formally underway, but we expect the RBI to present a strong economic case for a move," said Robert Prior-Wandesforde, Senior Asian Economist with HSBC in Singapore.
RBI governor Duvvuri Subbarao has lowered the repo rate and the cash reserve ratio (CRR) by 400 basis points each and the reverse repo rate by 250bps since taking charge last September. WPI has fallen to its lowest rate in decades (0.2 per cent year-on-year in early April) and could drop to -2 per negative levels later this year.
Consumer price inflation (CPI) inflation has, however, proved more stubborn.
Most public sector banks banks have cut their prime lending rates by less than 2 percentage points over the last six months, but home loans and unsecured borrowing rates are not budging. This could prompt the RBI to do more than just put verbal pressure on banks.