MPC meeting starts, may go for 0.25% rate cut

The six-member Monetary Policy Committee (MPC) began its deliberations on Tuesday amid widespread expectations of at least 0.25% (25-basis point) cut in the policy rate to cushion the impact of demonetisation.

This is the second meeting of MPC headed by Reserve Bank of India (RBI) Governor Urjit Patel after the first in October, when it had cut repo, or the short-term lending rate, by 0.25% to 6.25%.

RBI has reduced the policy rate by 1.75% since January 2015.

This will be the first monetary policy review after demonetisation of old Rs 500 and Rs 1,000 banknotes, following which banks witnessed a surge in deposits.

"Very difficult to predict because the MPC now decides. Maybe, like 25-50-basis point cut is what everybody is expecting and no rate cut will be a bigger surprise," SBI Managing Director Rajnish Kumar said.

Canara Bank MD and CEO Rakesh Sharma said that with softening of inflation, "we expect that RBI may go for a 25-basis point rate cut in the upcoming policy".

According to Bandhan Bank MD Chandra Shekhar Ghosh, there is expectation of a 0.25% cut in repo rate as the October inflation has shown decline and the demonetisation drive is further expected to lower inflation in November.

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In October, retail inflation stood at 4.20% while wholesale inflation eased to 3.39%.

"0.50% cut is not feasible this time around as there are still uncertainties surrounding US Fed rate hike," Ghosh added.

Echoing the views, IDBI Bank CFO R K Bansal said the central bank would ease the repo rate to 6%.

"The new two quarters are very important and they would like to see the impact of demonetisation," Bansal said.

Bankers said that with the increase in Market Stabilisation Scheme (MSS) ceiling to Rs 6 lakh crore from Rs 30,000 crore, RBI is unlikely to continue to apply the incremental cash reserve ratio (CRR).

In order to manage liquidity conditions, RBI on November 28 had asked banks to maintain an incremental CRR of 100% on deposits accrued between September 16 and November 11, 2016.

The temporary hike in CRR due to high deposits with banks is not a concern, but RBI should cut repo by 0.25% to 6% in the next policy review in December to adjust balance between high liquidity and interest rates, Yes Bank said.

According to State Bank of India (SBI), there is an expectation that inflation in November will be below 4%. 

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