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RBI may cut rates by 50 bps

November 27, 2008 19:59 IST
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The Reserve Bank may announce cut in policy rates up to 50 basis points soon as inflation has been on way downward for past three successive weeks, bankers said.

Given the softening of global commodity prices and crude oil, there is room for reduction in benchmark interest rates, Union Bank of India chairman and managing director M V Nair said.

Private sector lender HDFC Bank's treasury head Sudhir Joshi said RBI has scope to slash rates. the apex bank could cut short-term lending (repo) rate in between 25-50 basis points.

What is fuelling anticipation of rate cut by the RBI is inflation declining for the third straight week. The rate of price rise is at six-month low of 8.84 per cent for the week ended November 15 against 8.9 per cent in the previous week.

RBI has already shifted its focus from price management to growth as commodity and fuel prices have come down substantially in the last one month.

The decline in inflation may prompt RBI to cut policy rates or reserve ratios as demanded by bankers to enable them to cut interest rates to give a fillip to growth rates. Analysts feel that lowering of interest rates would also boost economic and business confidence.

Earlier, ICICI Bank CEO and MD K V Kamath had demanded that the RBI should ease money supply further to enable cut in interest rates by 200-300 basis points.

"The RBI now has enough room for a rate cut. Within this calendar year, I expect a 50 basis point cut in the repo rate and reserve repo rate. The slashing of the CRR will depend on how the liquidity situation emerges in the coming days," Crisil principal economist D K Joshi said.

The RBI had slashed repo rate by 50 basis points to 7.5 per cent in the beginning this month. Besides, the apex bank had also injected an additional estimated Rs 85,000 crore (Rs 850 billion) into the system by one per cent cut the Cash Reserve Ratio and Statutory Liquidity Ratio.

The RBI, since October has pumped in about Rs 2,70,000 crore (Rs 2700 billion) in the system but industry leaders and bankers feel that more is needed to effectively bring down the commercial lending rates.

Following several measures taken by the RBI, banks had reduced benchmark lending rates by 75 basis points leading to softening of home, consumer and corporate loans.

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