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RBI may not offer one more rate cut

RBI has found a little comfort in moderating inflation, but that may still not egg governor Duvvuri Subbarao to make further cuts in signal lending rates when he presents his first official credit policy review on Friday.

business Updated: Oct 23, 2008 21:31 IST
HT Correspondent

The Reserve Bank of India (RBI) has found a little comfort in moderating inflation, still in double-digits and is worried by slower growth in money supply as well – but that may still not egg governor Duvvuri Subbarao to make further cuts in signal lending rates when he presents his first official credit policy review on Friday.

The central bank earlier this week has already effected an unexpected sharp reduction in the repo (repurchase) rate at which it lends overnight money to banks against deposits of government bonds, to 8 per cent from 9 per cent. There is no sign that another cut may come so soon.

The undertone of worry over inflation remained etched in the central bank’s mid-year review of macroeconomic and monetary developments presented on Thursday. The report said inflation based on wholesale price index remained at elevated levels.

The rate slipped to 11.07 per cent in data released on Thursday, from 11.4 per cent a week ago, 7.7 per cent at the end of last March and 3.2 per cent a year ago.

The RBI could further raise the interest rate ceiling on deposits by non-resident Indians (NRIs) and waive the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) ratio on incremental NRI deposits, in an attempt to encourage inflow of more foreign exchange, said Namrata Padhye, Economist with IDBI Gilts, a primary dealer in government bonds.

RBI said comforting factor was that the year-on-year money supply (M3) growth was down to 19 per cent as on September 26 from 21.5 per cent a year earlier and compared with the central bank’s target of 17 per cent. The growth in credit has also slowed to less over 23 per cent, closer to the RBI target of 20 per cent.

The cut in the policy (repo or repurchase) rate, after releasing Rs 1,00,000 crore of banks’ cash reserves, was basically meant to stabilise the financial markets, which were wobbling on account of shortage of liquid funds in the aftermath of the global credit squeeze that led to a flight of capital. The RBI is seen comfortable with growth in the GDP slowing to a little less than 8 per cent in 2008-09, from a high of 9 per cent in 2007-08.

The RBI said it is closely monitoring the developments in the global as well as domestic financial markets and stands ready to take such pre-emptive action as may be necessary to contain excess volatility in the domestic financial markets.