\nThe RBI which has already indicated that \u201cit is too early for celebrations\u201d and that \u201cinflation has a long way to go\u201d, has been draining liquidity from the system through its open market operations. The RBI has already conducted five reverse repo auctions between October 29 and November 5 to enable banks park close to Rs 1,45,000 crore with the central bank. It has planned another Rs 25,000 crore reverse repo auction on Friday. Banks are sitting on excess liquidity, indicating that demand for credit has fallen. This is even as consumer price inflation, which at 6.46 per cent in September, had slowed to its lowest level since the data was first published in January 2012. Local banks are awash with liquidity and the yield on the 10-year benchmark bonds declined to over one-year low levels of 8.20 per cent, contributing to the clamour for a rate cut. The RBI had hiked repo rate by 75 basis points to 8 per cent between September 2013 and January 2014. Since then, it has been maintaining the 8 per cent level to check inflation.
\n\u201cI agree with the RBI observation it\u2019s too early to celebrate. The base effect will come into play from next month\u2026 last year at the same time inflation was at around 12 per cent. The US quantitative easing issue is yet to come. It\u2019s too early to say time has come for the rate cut,\u201d said Krishnamurthy Harihar, Treasurer, Firstrand Bank.
\nVG Kannan, MD & group executive, State Bank of India, said, \u201cMarkets are expecting a rate cut. Commercial paper rates and bond yields have fallen. And banks are carrying surplus liquidity.\u201d Many banks have slashed the deposit rate in the wake of declining credit offtake. According to Radhika Rao, Economist, DBS Bank, pressure is mounting on the RBI to cut rates at its upcoming review meeting in early December, but the central bank may not be swayed by the base effects-driven softening of inflation. Finance minister Arun Jaitley\u2019s recent call to lower rates to encourage construction activity has revived expectations of a rate cut.
\nThis is not surprising. In fact, analysts expect calls for rate cuts to intensify as the December rate review approaches, when weak September quarter GDP numbers and further softening in consumer price index (CPI) inflation will be on hand. Against this backdrop of weak growth and falling inflation, the Reserve Bank of India (RBI) is likely to face mounting pressure to ease rates at the December meeting. That said, the RBI will look past these base-effect swings to focus on anchoring inflationary expectations and ensuring medium-term stability. Will a rate cut boost investment? \u201cTo be sure, the monetary policy tool of cutting the interest rate is conventionally used to energise a flagging economy. But this does not hold true under all circumstances. Our study shows that factors behind the recent slowdown in economic growth and investment in India have little to do with high interest rates,\u201d Crisil said in a study.<\/p>\n","protected":false},"excerpt":{"rendered":"