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Reserve Bank of India may avoid a Lending Rate Cut

Reserve Bank of India

Reserve Bank of India may avoid a Rate Cut

The Reserve Bank of India faces growing pressure to cut interest rates later on Tuesday for the first time since April after the finance minister pledged to rein in the country’s fiscal deficit. The BSE Sensex & the NSE Nifty remained range bound ahead of the RBI’s monetary policy review today.  Indicating that a cut in interest rate is likely, the Reserve Bank of India has said despite high inflation it would take steps to support growth in the half-yearly review of monetary policy. The Reserve Bank of India said the government’s reform efforts are a move in the right direction but said swift implementation and further measures are needed. Reserve Bank of India also warned that Inflation remains a risk, a day before it is expected to keep interest rates on hold. Finance Minister P. Chidambaram at a news conference on Monday said that he would nearly halve the deficit in just over four years & this statement has increased the chances for a RBI rate cut on Tuesday. He avoided clarifying or providing details of any concrete steps on how he would achieve the goal. Chidambaram said India’s fiscal deficit would hit 5.3% of GDP this fiscal year, up from New Delhi’s earlier target of 5.1%. Chidambaram expressed confidence that the government will raise Rs 30,000 crore from stake sale in the public sector undertakings (PSUs) in the next five months. India has taken several recent measures to bolster investment and ease its fiscal deficit; including raising the diesel price and easing foreign direct investment in several industries, including supermarkets and airlines. “The announcement of these reform measures in themselves are not sufficient to ensure recovery as their impact would critically hinge on successful implementation,” the RBI wrote. A Reuters poll on October 19 found most economists expected the Reserve Bank of India to keep its policy repo rate unchanged at 8%. The RBI would take a more targeted measure and cut the cash reserve ratio, the share of deposits banks must hold with the central bank, from 4.5% in an effort to get banks to pass along earlier rate cuts to borrowers. The Indian Rupee- INR rose by 13 paise to 53.95 against the US dollar in early trade today at the Interbank Foreign Exchange on dollar selling by exporters and banks. The INR had lost 52 paise to close at 54.08 against the dollar yesterday on heavy month-end dollar demand from importers and corporates.

Reserve Bank of India remains focused on Inflation concerns:

The RBI – Reserve Bank of India has kept the policy Repo rate at 8% since April despite calls from members of the government and industry for action to revive the country’s flagging economic growth. Inflation at a 10-month peak in September is too high and that government action is needed instead to address its fiscal deficit and supply-side bottlenecks in the economy that fuel price pressures. The Government of India has unveiled a spate of reforms to bolster investment and rein in its fiscal deficit, including raising the price of subsidized diesel and lifting caps on foreign investment in several industries. The RBI said sustaining the reform initiatives of the government would be the precursor for a turnaround in economic activity. While those measures have improved the mood of markets, the central bank has sought more in order to improve the investment climate and lower the fiscal deficit. In a pre-policy review on Monday, the Reserve Bank of India said that New Delhi’s reforms were a step in the right direction but more was needed, and fast implementation was the key. The Reserve Bank of India said the Survey of Professional Forecasters has lowered the GDP growth projection to 5.7% from 6.5% for the current fiscal. Average wholesale price based inflation forecast is revised upwards to 7.7% from 7.3%. RBI said the global growth prospects, both in advanced and emerging economies have weakened and the Eurozone troubles have affected business confidence and caused deceleration in global trade & also the risks of spillovers from global financial markets remain. RBI also mentioned that the aggregate demand is weakening, led by the investment slowdown. However, persistent high core inflation remains a cause of concern. In its last policy review, RBI held interest unchanged, though it had lowered CRR by 0.25 per cent to infuse Rs. 17,000 crore liquidity into the system.

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