RBI credit policy: Cut in rates will be passed on; CRR cut vital, says BoI

Gaurav Kapur of the Royal Bank of Scotland says, in a reaction to the inflation data on CNBC-TV18, that though the central bank does have room to cut interest rates, a cut in the repo alone will not suffice. Kapur estimates the RBI to announce a bigger cut in the repo and CRR rates in its annual policy after reassessing the economic situation.

N Seshadri, ED, Bank of India is unsure of a probable cut in the CRR and says that a 25-bps rate-cut would definitely be in line with current requirement. He adds that a cut in the repo or the CRR would be passed on to the consumer. Below is an edited transcript of the discussion on CNBC-TV18 Q: What is your assessment of the possibility of a rate-cut? Gaurav Kapur: Cutting the repo cut per se will not help. In fact its utility stands largely diminished when lending and deposit rates surged the last time the repo rate was cut.
Liquidity must return but that seems unlikely with the government tightening expenditure and the RBI not too comfortable on cutting the CRR considering active open market operations (OMOs). I feel that if this level of inflation affords comfort to the RBI I think it perhaps makes sense for the RBI to cut the repo rate cut now and reassess the situation in the annual policy, where in my opinion, it will announce a bigger cut in the repo and perhaps time the CRR too.
This lack of liquidity is purely an end-of-the-year tightness. The government’s high cash balance is creating problems as well. Q: What do you suspect? Do you think that with inflation at 6.8 percent despite a fuel price hike is reason enough for the RBI to cut rates? If the repo was cut, would you change any of your lending rates? Seshadri: I think a 25-bps rate-cut would definitely be in line with the current requirement and I am sure RBI would announce a rate-cut. I am not too sure about the cut in CRR. It could partially address the dip in liquidity levels, which may be under strain on account of the advance tax collections and the year-end tightening of liquidity. Should one of these or both happen, banks would definitely passing on the deduction. Q: The CPI inflation is what affects the consumer the most. Will you cut deposit rates even if there is a cut in the repo and the CRR? Seshadri: The deposit cost is a composite basket. A large chunk of these high-interest deposits which were contracted by the banks last year for a one-year maturity period, if they are replaced, will be replaced with a higher interest rate. There is actually a reduction of 50-75 basis points for most of the banks. The reality is that March is always an expensive quarter to raise money. Q: Will you be able to cut lending rates if not now maybe after March 31? Seshadri: Yes, absolutely because growth is important and if that growth can be helped with an interest rate-cut, banks definitely will be better off in terms of profitability.