Should RBI hold on a rate cut today?

The second Monetary Policy Committee (MPC) meeting will announce its policy at 2.30 pm on Wednesday. Analysts are expecting repo rate cut anywhere between 25 to 50 basis points.

However, is another rate cut actually required?

During the former RBI Governor Raghuram Rajan's tenure, the central bank has reduced the policy rate by 1.75% since January 2015.

On June 25, Rajan had said, "Our main aim is to ensure that the markets themselves continue providing whatever is needed but if there is disruption in markets and liquidity is not available from certain quarters, we are fully ready to provide whatever dollar or rupee liquidity is needed".

On November 8, Prime Minister Narendra Modi in a surprise move announced the ban on high denomination notes, which accounted for 86% of the total currency. Following the announcement, the public had no other option but to deposit money in banks or park their money in financial investments schemes.

According to a CARE Ratings report, as on November 11, 2016, bank deposits amounted to Rs 101 lakh crore - growth of 8.4% compared with 6.1% growth registered during the corresponding period last fiscal. 

Post demonetisation there has been significant uptick in the bank deposits – Bank deposits to the tune of Rs. 8.11 lakh crore have been added during November 10 to November 27.

With this, the issue which the RBI has been worried about, so called "liquidity" in the market was solved. In fact, major lenders including ICICI Bank, HDFC Bank, State Bank of India had lowered fixed deposits rates by up to 0.25%.

Moreover, when the RBI has cut nearly 1.75% of interest rates, banks have passed hardly a third of these rate cuts to the borrowers. 

One of the reason could be the problem of rising Non Performing Assets. The bad loans pile has restricted the banks to take risks of transferring the benefits. Recently, Finance Minister Arun Jaitley had said  that the amount of top 20 NPAs in public sector banks is Rs 1.54 lakh crore. 

Further, in order to absorb the surge in liquidity in banking system following demonetisation the RBI had introduced an incremental Cash Reserve Ratio (CRR) of 100%. 

CRR is the portion of the deposits which banks are required to park to the RBI. Currently it is at 4%.

Also, the RBI decided to revise the ceiling for issue of securities under the Market Stabilisation Scheme (MSS) to Rs 6,000 billion (Rs 6,00,000 crore).

Both the move (CRR and MSS) were part of demonetisation method where banks are seeing uptick in their cash deposits. Since the announcement of CRR, the liquidity surplus has contracted.

Also Read: MSS limit may provide leeway to RBI's 100% CRR incremental maintenance

Now, with the liquidity in the market, it is important to see the banks lowering the rates and passing it to customers.

In this scenario, should RBI wait for two more months before cutting rates?