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Will RBI cut interest rates tomorrow?

business Updated: Oct 28, 2012 23:24 IST
HT Correspondent

After the government's big-bang reforms announcements in September, loan borrowers, business leaders, economists and policy makers have one question for Reserve Bank of India governor D Subbarao: Will there be a cut in interest rates on Tuesday?

Rising prices - inflation stood at 7.81% in September -has made the task all the more difficult for Subbarao, who is caught in the battle between spiralling costs and stalling growth.

"Inflation at 7.81% is unlikely to provide much comfort to the RBI," said Indranil Pan, chief economist, Kotak Mahindra Bank.

"For a risk-averse central bank, the RBI is not expected to let its guard down on inflation risks immediately."


Last month, the RBI had kept the repo rate unchanged at 8% and industry leaders have been rachetting up their demand for a rate cut.

A higher repo pushes up banks' borrowing costs prompting them to increase interest rates for final home, auto and corporate borrowers.

Experts said that while one might attribute the uptick in inflation to the Rs. 5 a litre diesel price hike in September, there has also been an across-the-board increase in prices of manufactured items and price pressures are unlikely to wane anytime soon.

"With the risks of inflation clearly tilted to the upside we do not think it appropriate for the RBI to let its guard down on inflation," said Sonal Varma of Nomura.

The RBI may slash the cash reserve ratio (CRR) to bolster banks' pool of lendable resources.

A 0.25% point cut in CRR - the proportion of deposits banks have to park with the central bank --will give banks access to an estimated Rs. 7,000 crore of additional funds to lend.

"We see the possibility of the RBI cutting the CRR by 25 basis points," said Varma.