After the US Fed rate-cut early this week, Indian bankers said on Thursday Reserve Bank may resort to a 0.25 per cent cut in the cash reserve ratio in its monetary policy review on January 29, sending strong signals for a rate cut.
Though the Reserve Bank of India would want to keep excess liquidity under check to contain inflation, it may still go for a CRR cut to enable banks lower interest rates in order to spur growth through increased credit offtake.
The apex bank was widely believed to pitch for stable rates, but bankers now feel it might go for a marginal CRR cut even though it would have preferred to maintain the status quo.
HDFC Chairman Deepak Parekh had said that interest rates could soften by 0.25-0.50 per cent if there was no hike in CRR.
After the Fed rate cut, there are now all the more reasons to cut rates.
Dena Bank Chief P L Gairola felt that one could expect a 0.25 per cent cut in CRR accompanied by a 0.25-0.50 per cent cut in rates.
The difference between the repo and reverse repo rates, now at 1.75 per cent, could also be reduced, he said.
High crude oil prices and an unprecedented volatility in the stockmarket may prompt the regulator to come with a tight policy, a senior official with DBS Bank said.
"A cut by 0.50 per cent in interest rate will be a fair expectation. I don't think the CRR will be hiked this time," the official said.
The recent volatility in the stockmarket is unlikely to have any major impact on the India growth-story, given the fundamentals of the economy which are strong, he said.
"Interest rates appear to have peaked," State Bank's Chairman O P Bhatt said, adding, "the rates may remain the same."
Noting that the factors driving the US economy and Indian markets are different, Bhatt said that these factors must be examined prior to taking any decisions on interest rates.
High interest rates had resulted in a general slowdown in lending for the domestic banking industry, which dwindled to 20-22 per cent in the current fiscal as against a nearly 30 per cent growth in FY 07.
Even market leaders, SBI and ICICI, have faced a sharp decline in credit growth.
ICICI Bank's Executive Director V Vaidyanathan said the banking regulator would have to consider a host of issues, including inflation, liquidity and price stability, while considering a rate cut.
"The US Fed cut will not be the only factor that RBI will have to consider. There are several other issues that need to be examined," he said.
Union Bank of India Chairman M V Nair, believes the central bank may leave the interest rates unchanged. "Any changes in interest rates are unlikely in the policy this time," he said.
Bank of India Chairman T S Narayanasami also said, RBI was likely to maintain a status-quo in rates, as a cut now could result in further inflationary pressures.
"Global markets are still volatile and so is the domestic market. I feel a status quo will continue in the medium-term perspective," Narayanasami said.
Given the continuing inflows into the domestic system, a 0.25 per cent hike in CRR was also a possibility, he said.
