RBI may cut CRR but keep rates on hold

Tuesday, 24 January 2012 00:00 - - {{hitsCtrl.values.hits}}

Reuters: The Reserve Bank of India (RBI) is not expected to cut interest rates at its review on Tuesday as it remains worried about inflation, but it may cut the cash reserve ratio (CRR) for banks as a way to relieve tight liquidity, a move that would cheer markets as a sign of easing intent.

Economists polled by Reuters last week were unanimous in their view that the Reserve Bank of India will keep rates on hold this week, despite weakening economic growth.

A minority -- 7 out of 20 -- forecast that the RBI would cut the CRR, the proportion of deposits that banks must hold with the central bank, by 25 or 50 basis points from 6 percent, where it has stood since April 2010.

“Liquidity tightness is persisting and it is getting far too uncomfortable. More importantly, it has not eased after the open market operations,” said Shubhada Rao, chief economist at Yes Bank, referring to bond buybacks by the central bank.

A cut in the CRR would ease banking system liquidity tha has been far tighter than the RBI’s target of 1 percent surplus or deficit in terms of aggregate deposits.

On Monday, banks borrowed 1.42 trillion rupees from the RBI’s repo window, more than double the 600 billion rupees that would indicate a deficit of 1 percent.

Anjali Verma, an economist at MF Global, said the yield on the benchmark 10-year government bond could fall 2 or 3 basis points from 8.19 percent now if the RBI cuts the CRR.

Verma, who expects a CRR cut on Tuesday, said the yield could rise to 8.25-8.30 percent if the RBI leaves the CRR on hold.