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Cautious RBI may hold rates

india Updated: Jan 23, 2012 02:27 IST
HT Correspondent
HT Correspondent
Hindustan Times
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As policy makers at North Block, which houses the finance ministry, grapple with the upcoming Union Budget, all eyes will be on Mumbai's Mint Street, watching the next move of the Reserve Bank of India (RBI) on interest rate hikes, amid expectations that it would maintain status quo in its policy review on Tuesday.

However, the RBI is tipped to cut the cash reserve ratio - the proportion of money the banks have to park with the central bank - to inject more funds into the pool of banks' lendable resources so as to stimulate the sagging economic growth.

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The accompanying policy comments will come under close scrutiny of stock markets and economists for RBI's assessment of the current situation and cues for the future.

"There was never a strong case for a rate cut at the upcoming policy review," said Rajeev Malik, senior economist broking and research firm CLSA. "We maintain our view that the RBI will likely cut rates after the budget in mid-March."

Economists, however, did not rule out a cut in the cash reserve ratio (CRR).

"In our view, a CRR cut is warranted," said Sonal Varma, economist at Nomura. "We estimate a 0.50 percentage point cut in the CRR would inject Rs 30,000 crore of liquidity without a significant inflationary impact."

RBI had raised the repo rate -the rate at which bank borrow from the central bank - 13 times to 8.5% since March 2010 to tame inflation, before calling a halt last month as prices showed signs of declining.

India's inflation rate fell to a two-year low of 7.47% in December pulled down by slumping food prices.

Non-food manufactured goods inflation eased to a 5-month low of 7.7% - it was 7.9% in the previous month - but it still remains elevated, prompting economists to argue that RBI may not slash interest rates just yet.

The weak rupee has made most imported raw materials costly and knocked up prices of many goods produced in India.

Hopes of an industrial rebound have sprung anew after India's factory output grew by 5.9% in November, a sharp rise from a contraction of -4.7% in October, warming up the winter chill for a government hit by corruption scandals and sagging political stock.

Buoyed by strong output numbers in coal, cement, electricity and refinery products, as well as consumer durables output the overall Index of Industrial Production (IIP), bounced back smartly to record its fastest growth since June.