Hopes of RBI rate cut increase

Updated on Jan 22, 2008 10:12 PM IST

The impending credit policy review is expected to set the tone for a downward trend, even if there is no direct cut in repo or RRR, reports BS Srinivasalu Reddy.

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Hindustan Times | ByBS Srinivasalu Reddy, Mumbai

There is only one way for the interest rates from here on – downwards. But when it will happen is a billion dollar question. The impending credit policy review scheduled for next Tuesday (January 29) is expected to set the tone for that, even if there is no direct cut in repo or reverse repo rates.

Reverse repo rate is the rate at which bank deposits with the RBI fetch (6 per cent) and repo rate is the rate (7.75 per cent) at which RBI lends to banks.

The US suprime crisis, which is the root cause of turmoil in global markets and is likely to force that country into recession, has a silver lining. To counter this problem if the US Federal Reserve (RBI’s counterpart in the US) resorts to drastic pre-meeting cut of 0.5 per cent in its benchmark rate, the Reserve Bank of India may feel the pressure to cut rates in India too, according to economists A Prasanna of ICICI Securities and Sachchidanand Shukla of Enam Securities.

With the US Fed responding to the challenge by lowering interest rates by 75 basis points on Tuesday, not waiting till its meeting dates (on January 29 and 30), it is evident that if RBI does not reciprocate the cut, India would attract more foreign foreign investments.

This may revive the concerns of high foreign inflows prompting destabilising on inflation and rupee fronts that RBI had been battling a few months back.

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