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Rediff.com  » Business » RBI may not cut rates despite near-zero inflation

RBI may not cut rates despite near-zero inflation

April 16, 2009 19:58 IST
Inflation fell to a three-decade low of 0.18 per cent, fuelling expectations that the Reserve Bank would signal cut in lending rates by banks as demanded by the industry which posted negative growth in February as well.

However, bankers feel that RBI might not go for rates cut in its April 21 monetary policy review, but some time later as liquidity is enough in the system.

"RBI is likely to cut repo and reverse repo (short term lending and borrowing) rates by 50 basis points by May-end to help banks reduce lending rates further," Oriental Bank of Commerce Executive Director S C Sinha said.

Yes Bank Chief Economist Shubhada Rao said she believes there was room for rates cut, but it might not happen during the April 21 meeting as banks were yet to cut lending rates.

However, she said even if RBI cut key rates, it might not translate into lower lending rates immediately, as banks had already taken deposits at high rates.

In fact, RBI Governor D Subbarao had expressed surprise as to why banks were not cutting lending rates adequately in response to reduction in key rates by RBI.

"Being a monetary authority, RBI cut policy rates, which should have been transmitted to lending rates by banks. Policy rates have to be transmitted to lending rates by banks... We are talking to banks to understand what their perception is," he had said adding interest rates should come down for India to become competitive.