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RBI may tone down stance in year's first policy review

The Reserve Bank of India (RBI) may usher in a more softer stance when it unveils its first monetary policy review of the financial year on Tuesday While some economists say that the central bank may cut the repo rate by another 25 basis points as inflation is receding and the threat from oil and commodity prices is benign, others say that it may seize the opportunity to normalise monetary policy.

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The Reserve Bank of India (RBI) may usher in a more softer stance when it unveils its first monetary policy review of the financial year on Tuesday While some economists say that the central bank may cut the repo rate by another 25 basis points as inflation is receding and the threat from oil and commodity prices is benign, others say that it may seize the opportunity to normalise monetary policy.

Repo rate is the rate at which the central bank lends overnight money to commercial banks. Most banks are yet to cut interest rates despite the RBI cutting policy rates by 50 basis points (one basis point is one-hundredth of a percentage) in January and March. Everyone is hoping that rates will start sliding soon.

Many believe that bankers are waiting to take cues from the monetary policy to cut the base rate (the rate below which no bank can lend).

With the RBI having cut rates by 50 basis points, it is expected that banks will see the tone of the monetary policy before they revise rates. With the debt market rates around 8-9%, banks are also losing out business to the debt market or are forced to invest in corporate debts at lower rates.

Morgan Stanley said in a report that inflation outlook and the real rate policy framework followed by the central bank means that the RBI will cut rates by a further 100 basis points (one percentage) through calendar year 2015, with the first move happening during the April 7 meeting.

"The framework for monetary policy response remains unchanged, with the RBI likely to target real rates of around 175bps. Thus we believe that the inflation trajectory will be the key to the magnitude of rate cuts. As we have been highlighting, we believe that inflation will decelerate to 4.75% by end 2015 in our base case and 4% in our bull case scenario," it said.

While other economists do not think there will be a repo rate cut, they believe the RBI will normalise its monetary policy stand like letting banks to have lower daily limits on CRR (Cash Reserve Ratio). CRR is the quantum of deposits that banks have to keep with the central bank as a reserve requirement.

On a daily basis, banks need to maintain only 70% of this limit but on a fortnightly basis, they have to keep 100%. The RBI had hiked the daily limit to 99% and then reduced it to 95%. Now, it is expected that it may be brought back to 70% daily.

However, bankers also look forward to a reduction in the CRR as it immediately infuses liquidity into the banking system and gives an immediate impetus to reduce rates.

Arundhati Bhattacharya, chairman of State Bank of India (SBI), told dna, "My preference will be for a CRR cut. It is unlikely that RBI will normalise monetary policy as it runs counter to the recommendations of the Urijit Patel Committee recommendations."

In January 2014, the committee had targeted the gradual slide in inflation from the then level of 10-8% over one year and to 6% over a two-year period before formally adopting the recommended target of 4% with a band of +/- 2%.

With inflation on the decline, what with average retail inflation declining by 350 basis points in FY15 to 6% in contrast to the average of 10% last year, there is a lot of solace for RBI on the inflation front.

But unseasonal rainfall and hailstorm in the northern, central and western parts of the country, about 30% of the rabi crop acreage could be vulnerable, according to government estimates.
NS Venkatesh, executive director, IDBI, told dna, "The policy will be dovish but there may not be any rate action nor will the central bank take measures to infuse liquidity as the banking system has sufficient liquidity."

Yes Bank, in its report said, "We expect RBI to focus on improving the monetary policy transmission mechanism by considering steps like restoration of daily CRR maintenance to 70% from 95%, relaxation in cap on overnight fixed rate repo auction under LAF to 0.5% of NDTL (net demand and time liabilities, they stand for deposits) from 0.25% and provision of Rs 45,000 crore potential liquidity by cutting SLR by 50 basis points to 21% of NDTL.

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