Credit policy: Will RBI bite the bullet on June 18?

A rate cut from RBI seems to be the demand of the hour. The industry wants it, the government wants it and market players want it. The ball is now in RBI's court. But while one RBI deputy governor has hinted that there is headroom for rate cuts, another seems to have ruled it out. CNBC-TV18's Gopika Gopakumar and Arvind Sukumar report that the markets are hoping and praying that a rate cut may come even before the June 18 policy meeting.

Prime Minister Manmohan Singh has stepped in to take the bull by the horns and looks to boost growth. The corridors of power are buzzing about various steps that are on the anvil, from sops for exporters to rescue packages for power companies and rebooting the reforms process. The latest comes even as the central bank gets ready for a policy meeting on June 18 and the government appears to be pushing for a rate cut.

Top government officials have acknowledged the fact that there is a growing section of people who feel that the RBI's recent monetary policy stance has hurt investment and profitability. They add that this view has been conveyed to the RBI.

A government source says, "There is a preponderance of opinion that monetary policy should now act as an agent of economic growth." The government is not alone. Last week, industry body CII pushed for a 100 basis point cut each in repo rate and CRR. However, India Inc blames the liquidity crunch for keeping growth shackled.

Market experts also point out that while there may be dismay from the US Federal Reserve for not providing concrete indications of further stimulus to the US economy, China has cut rates and maybe it's time for India to follow suit. Some also point out that if history is anything to go by, RBI will act before advance tax payments are made. It did on March 9, a week before advance tax, by cutting CRR. Now, advance tax numbers are expected on June 15, just before the RBI credit policy.

But the markets' hopes have been fuelled by remarks from RBI deputy governor Subir Gokarn four days ago.

Gokarn had said, "The elbow room is coming from lower oil prices. I think the levels that we are seeing today, USD 97-98 per barrel are somewhat lower than most people anticipated, maybe a month or two ago. That is providing some room. Not withstanding the rupee depreciation over this period, the drop in oil prices has gone a bit above the extent of rupee depreciation. So, there is some elbowroom there."

However, Gokarn did caveat this saying it all hinges on how inflation numbers come in. His colleague, deputy governor KC Chakrabarty has lashed out at reporters for fuelling speculation of a rate cut by blaming high rates for the slowdown.

Chakrabarty said, "I don't know how much growth sacrifice is due to lack of productivity, lack of efficiency and due to inflation. Don't think interest rates are that high or our policy rates are high enough to significantly affect growth.  You are overplaying the interest rate aspect." He also argued that a 200 basis point cut in policy rates would not be of any significant help.

"Growth has been affected due to variety of reasons. There are two set of borrowers. One is the corporate borrowers. If you look at the corporate balance sheet, 6-7% of their total cost is interest costs. Even by reducing the interest cost by 2%, their cost is not going to be affected too much," explained Chakrabarty. 

But the markets are not buying this argument entirely because there was a sharp spike in the banking index and bank stocks just minutes before trade ended.

And the big question on the street seems to be shifting from: is there a rate cut on the cards to will the cut come before the policy, or on policy day itself?

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