What’s On The Cards? CRR Or Repo Cut?

Vidrum / 28 Feb 2012

In our opinion, in the next policy i.e. on March 15 the RBI will probably cut the CRR as banks are still facing a liquidity crunch and may not go ahead with the repo and reverse repo cut.
On 27th February 2012,  Economic Times has reported that the finance Mmnister is pushing state-owned banks to change their stance of revising the interest rate in the next fiscal. The emphasis is on cutting the lending rates before March 2012. Earlier, the Reserve Bank of India (RBI) in its third quarter monetary review on January 24, 2012 had cut the cash reserve ratio (CRR) by 50 basis points to 5.50 per cent and had continued maintaining a dowish stance. 

With the wholesale price inflation showing signs of cooling, the markets expect a rate cut in its next review which is on March 15, just a day before the Union Budget is presented. We on the contrary believe that the RBI may not cut the repo rate as it is still early to move in the opposite direction. However, one may expect a small reduction on the CRR this time too. 

Meanwhile, the wholesale price index (WPI) for the month of January 2012 came in at 6.55 per cent, down by 92 basis points when compared to the previous month. However, the consumer price index (CPI) came in at 7.65 per cent for the month of January 2012. CPI is the broader way of gauging inflation as it takes the prices at the retail level or at the ground level where the consumers buy various goods. Now the questions arises about what is the comfort zone that the RBI feels for CPI? It had projected the WPI to be at 7 per cent by FY12. We believe that the CPI projection should be below the WPI expectation as the latter is actually more relevant to the consumers. 

The index of industrial production (IIP) has not been showing any clear signs of directions. The IIP for October showed de-growth, while for the month of November it spiked to 5.94 per cent and then again in December it showed a marginal growth of 1.8 per cent. The advance GDP growth for FY12 has dipped to 6.9 per cent as against 8.4 per cent tin FY11. The RBI is focusing on the growth path and wants the economy to be revived. With the recent CPI data, it raises a question about what will be the RBI’s next move.

On the other hand, the banks are taking small steps which clearly indicates signs of interest rate reversal. On December 29, 2011 the Union Bank had slashed its base rate by 10 basis points to 10.65 per cent. The base rate is the minimum rate at which the banks offer loans to their customers. The Bank of Maharashtra followed suit and approximately a week ago slashed it by 10 basis points to 10.60 per cent. Also, the Central bank of India last week lowered its home loan rate by 25 basis points. 

We believe that the RBI will not cut the rates in the immediate next policy. A banker, on the condition of anonymity, said that the interest rate reversal will probably start from FY13. 

One should note that the rate movement started northwards from February 2010, which is two years ago, and we believe that this phase is one of taking a pause before moving into the opposite direction. 

In our opinion, in the next policy i.e. on March 15 the RBI will probably cut the CRR as banks are still facing a liquidity crunch and may not go ahead with the repo and reverse repo cut. The true benefits of the rate cut in the banks’ books may be seen from the first quarter of FY13. 

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