SENSEX NIFTY
Apr 15, 2013, 02.44 PM IST | Source: Moneycontrol.com

Mar WPI inflation 5.96%; will RBI cut repo rate on May 3?

Economists say it may be too early cheer the lower March WPI reading even if does lead to a cut in interest rate by the RBI, which in any case is unlikely to be more than 25 basis points.

Moneycontrol Bureau

The clamour for the Reserve Bank of India to cut interest rates at its policy review meet on May 3 has grown louder with March wholesale price index-based (WPI) inflation dipping to a 40-month low of 5.96 percent.

Economists say it may be too early cheer the lower March WPI reading even if does lead to a cut in interest rate by the RBI, which in any case is unlikely to be more than 25 basis points.

There are two reasons why the market needs to be circumspect. One, consumer price index-based inflation continues to remain high. Two, the cut in policy rates by the RBI is not really translating into a similar cut in lending rates of banks.

Experts say that the RBI should focus on improving liquidity in the system, which in turn will lead to lower interest rates at the consumer level.

“Remember we have had a 100 bps of policy rate cuts since last April and except for corporate bond yields you have seen no transmission of that,” Sajjid Chinoy of JP Morgan said in an interview to CNBC-TV18.

"So if you want these rate cuts to matter, what we now need to focus on is how do you ease liquidity conditions enough to get adequate transmission," he said.

The main challenge for banks is that deposit growth rate has been weak despite attractive deposit rates. They risk further alienating savers if the deposit rates are reduced.

Lower-than-expected March wholesale price inflation of 5.96 percent could at best make the case for a 25 basis-point reduction in interest rates, feels Indranil Pan of Kotak Securities.

"The zone of focus for the RBI needs to shift from only repo rate (cut) to CRR (cut) which we are not really calling for in the May policy. But future activity should be more in terms of liquidity generation; reserve money creation so that the pass through of the monetary policy to the real economy happens," Pan said in an interview to CNBC-TV18.

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