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RBI acts to prop up growth: Economists

Concerns over slipping economic growth this fiscal, the Reserve Bank to signal a lower interest rate regime aimed at propping up growth, economists said.

business Updated: Nov 02, 2008 14:23 IST

Concerns over slipping economic growth this fiscal combined with the danger of its possible aggravation in the next, seem to have prodded the Reserve Bank to signal a lower interest rate regime aimed at propping up growth, economists said.

The Reserve Bank on Saturday cut its repo rate by 0.5 per cent to 7.5 per cent while simultaneously slashing the cash reserve ratio (CRR) by 1 per cent to 5.5 per cent.

With this, the apex bank has cut the repo rate by 1.5 per cent and CRR by 3.5 per cent since early-October.

"The Reserve Bank has sent an explicit signal to banks to lower their lending rates and that economic growth and financial stability have taken precedence over inflation control," Crisil Director and Principal Economist D K Joshi told PTI in Mumbai.

Despite the apex bank still harbouring concerns over inflation, it is dipping "sharper than expected" and this has given the RBI some flexibility to reduce rates, Joshi said.

Banks were now expected to begin reducing both their lending and deposit rates.

"It (reduction) will be gradual, between 0.25-0.50 per cent. I see a clear lowering of the interest rate regime," Joshi said.

Banks would first cut their deposit rates before amending their lending rates, Bank of Baroda Chief Economist Rupa Rege Nitsure said.

"I expect a 0.50 per cent cut in both over the next fortnight," she said.

More rate cuts could be expected as "inflation is clearly and rapidly abating. Besides, global cues are also benign," Yes Bank Chief Economist Shubhada Rao said.

A further cut in repo rate going forward would nudge banks to lower their rates but this would be subject to availability of adequate liquidity, she said.

Addressing liquidity would continue to engage the RBI's attention, Joshi said

"Call rates have shot up and this means that liquidity is tight. This is an extraordinary situation and liquidity management will be high-priority for the RBI," he said.

Apart from concerns over liquidity tightness in the system, the series of RBI measures in recent weeks also show that the apex bank is beginning to be concerned about economic slowdown and the possibility of its carry-over effect into the next fiscal, the economists said.

"The RBI now wants to give a stimulus to economic growth--it does not want high interest rates to act as a dampener to growth," Nitsure said.

The economists expected economic growth in FY 09 to be at around 7.5 per cent, which they considered a healthy growth rate.

"When several economies are slipping into recession, for an emerging economy like India to achieve a 7.5 per cent growth is indeed healthy," Nitsure said.