The rate-setting Monetary Policy Committee (MPC) today began its third review meeting amid mixed expectations of possible rate cut by the Reserve Bank of India.
Expert opinions were divided if the RBI Governor-led panel will recommend cut in interest rate by 0.25 per cent to give fillip to growth or maintain status quo because of inflationary pressure from rising oil prices.
Banks are flush with low cost deposits on account of demonetisation of high value currency notes of Rs 500 and 1,000, as a result of which their lending rates fell by up to 1 per cent last month.
Although banks and industry have been pitching for cut in benchmark repo rate (short-term lending rate), the six-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel may adopt a cautious approach on February 8, especially in view of spike in crude oil prices and growing protectionist sentiment with Donald Trump taking charge as the US President.
Oil (Brent) prices have risen to USD 56.8 per barrel, while President Trump has announced a host of protectionist measures which will impact the global economy, including India.
According to PNB Managing Director Usha Ananthasubramanian there is an all-round expectation of 25 basis points cut in interest rate.
However, the transmission has already taken place and the further rate cut would depend on how long this low cost deposits stays with the bank.
"Most of the banks have already front-loaded rate cut and if need be there would be further rate cut," she said.
In Patel's first policy review as RBI Governor in October, which was also the maiden review of the MPC, the repo rate was reduced by 0.25 per cent to 6.25 per cent.
In the following policy meet in December, the repo rate was retained at 6.25 per cent. However, RBI has cut repo by 1.75 per cent since January 2015.
"We are expecting 25 basis points cut in repo rate because macroeconomic factors like inflation, fiscal deficit are conducive for reduction. Given the growth-oriented budget, there is a widespread speculation that RBI would respond in the same spirit," Bank of Maharashtra Executive Director R K Gupta said.
There are expectations of 25 basis point rate cut as there is excess liquidity in the system, UCO Bank MD CEO R K Takkar said.
Bandhan Bank Chairman and Managing Director Chandra Shekhar Ghosh said that the RBI is unlikely to cut rate as banks are flush with funds.
According to industry body Ficci, the RBI is likely to maintain status quo in the upcoming monetary policy meet and cut rates in the first half of fiscal year 2017-18.
Rising for the fifth straight month, retail inflation or CPI quickened to 5.61 per cent in December, mainly on costlier vegetables and cereals, limiting the headroom for the RBI to lower rates.
However, WPI or wholesale inflation fell in December but the rate of decline at 0.73 per cent was the slowest in last one year as food prices shot up, indicating return of inflationary pressures.