RBI poised to lower interest rates again
A further cut in policy interest rates is expected when the RBI conducts its third quarterly review of the monetary policy on Tuesday, reports Rajendra Palande.india Updated: Jan 25, 2009 20:30 IST
A further cut in policy interest rates is expected when the Reserve Bank of India (RBI) conducts its third quarterly review of the monetary policy on Tuesday. A 50 basis point (100 basis points is 1 percentage point) cut in the rate at which the central bank provides overnight liquidity to banks (repo rate) as well as the rate at which it absorbs liquidity from banks is widely expected.
RBI has the ability to lower policy rates since economic growth is slowing down, commodity prices are falling, and more cuts in fuel prices are on their way. “We expect the inflation rate to fall to around 2.9 per cent in March,” said Shailesh K Jha, senior regional economist, Barclays Capital.
Namrata Padhye, economist, IDBI Gilts, seeks a wait and watch approach. “A gradual approach towards easing would ensure that no panic is created in markets over the outlook on domestic economy.”
Since September 15, 2008, the RBI has eased policy rates by 350 basis points, but banks have reduced rates, grudgingly, by just 150-200 basis points.
“Fear of non-performing loans has made banks cautious, resulting in aggressive policy easing not being matched by banks lowering rates or increasing advances,” said Rohini Malkani, economist, Citigroup. “Moreover, prospects of lower rates, at times increases the incentive for banks to hold government bonds.”