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All eyes on rains for rate cut before Oct

RBI maintains status quo, says there is a possibility rate cut before next policy on September 29 if there is sufficient clarity on the monsoon, inflation and stance of the US Federal Reserve

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Raghuram Rajan, Governor, RBI
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As widely anticipated, the Reserve Bank of India (RBI) kept interest rates unchanged on Tuesday when it unveiled the third bi-monthly monetary policy in the current financial year.

But the central bank said there is a possibility of it cutting rates even before it unveils its monetary policy on September 29, if there is sufficient clarity on the monsoon, inflation and stance of the US Federal Reserve.

Banks, meanwhile, said interest rates are trending downwards but deposit rates will have to soften before cutting lending rates further.

Banks are already looking at reducing deposit rates selectively. For instance, Oriental Bank of Commerce has reduced interest rates by 0.25% in select maturities.

In a post policy press conference, central bank governor Raghuram Rajan said, "We are waiting information. There was more need to move fast in the early stages of the turnaround."

"We will take all information into account and decide whether at times it warrants moving in between policy cycle or it does not," he said after unveiling the monetary policy review.

Banks are likely to cut their deposit rates. They are awaiting the government to revise rates on the small savings instruments like the Public Provident Fund and the postal savings schemes. Only after the cost of funds fall further will banks lower lending rates, say experts and analysts.

N S Venkatesh, executive director and chief financial officer, IDBI Bank, said, "RBI governor is waiting for the outcome of the US Federal Reserve Meeting on September 17 and its impact on the global and Indian markets. There may not be a mid-policy rate action I think he will wait for the September 29 monetary policy to ease rates."

The hope for the RBI is the sharp fall in crude oil and other commodity prices will continue to ease the upward pressure on inflation. The RBI has lowered its CPI inflation projections for January-March 2016 CPI by 20 basis points, and now sees the risks to its January 2016 forecast of 6% as balanced.

However, with the dollar depreciating on Tuesday, oil recovered to just above $50 a barrel on Tuesday after touching a six-month low in the previous session, although high global production and concern over the economic outlook in China could still subdue prices.

Arundhati Bhattacharya, chairman, SBI, said, "RBI decision to hold rates was expected. The good thing, however, is that the RBI forward guidance clearly spells out the possibility of more monetary accommodation. In our view, though such action will be data dependent, there seems to be a bias towards further rate cuts. The lowering of inflation projection by RBI in the last quarter is an acknowledgement of a benign inflation trajectory."

Chanda Kochhar, managing director and CEO, ICICI Bank, said, "RBI has noted encouraging trends in growth, indicative of a strengthening recovery. At the same time, it has opted to monitor inflation trends for some more time before taking any further steps to ease monetary policy. I expect to see easing of rates over a period of time as further transmission of accommodative monetary policy takes place. Inflation is within the targeted range and should this trend sustain, we could see further policy rate action as well."

Ratings agency Crisil, however, believes that one more repo rate cut – of 25 basis points – can happen in 2015. "Odds are high for a rate cut in September – on or before its next monetary policy meeting on September 29. By then, there will be sufficient clarity on the rainfall situation, pace of economic recovery in first half of the fiscal and stance of the US Federal Reserve on monetary policy tightening," it said in a report.

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