MPC meeting to begin today, may propose 25 bps rate cut

The six-member Monetary Policy Committee (MPC) will begin its deliberations from Tuesday amid widespread expectations of at least 0.25 per cent cut in policy rate to cushion the impact of demonetisation. This would be the second meeting of the MPC headed by RBI Governor Urjit Patel after the first that happened in October, when it had cut the repo rate or short term lending rate by 0.25 per cent to 6.25 per cent.

Urjit Patel, is an Indian economist, consultant and banker, who had major positions in MNCs is currently serving as Governor of the Reserve Bank of India. The RBI has reduced repo rate by 1.75 per cent since January 2015.

This will be the first monetary policy review after demonetisation of old Rs 500 and Rs 1,000 currency notes, following which banks witnessed surge in deposits. “Very difficult to predict now because the monetary policy committee now decides. Maybe, like 25-50-basis point cut is what everybody is expecting and no rate cut will be a bigger surprise,” SBI Managing Director Rajnish Kumar said.

Canara Bank MD and CEO Rakesh Sharma said that with softening of inflation, “we expect that RBI may go for a 25-basis point rate cut in the upcoming policy”.

According to Bandhan Bank Managing Director Chandra Shekhar Ghosh, there is expectation of a 0.25 per cent cut in repo rate as the October inflation has shown decline and the demonetisation drive is further expected to lower inflation in November.

In October, retail inflation stood at 4.20 per cent while wholesale inflation eased to 3.39 per cent.

“0.50 per cent cut is not feasible this time around as there are still uncertainties surrounding US Fed rate hike,” Ghosh added. Echoing similar views, IDBI Bank CFO R K Bansal said the central bank would ease the repo rate to 6 per cent.

“The new two quarters are very important and they would like to see the impact of demonetisation,” Bansal said.

Bankers opined that with the increase in Market Stabilisation Scheme (MSS) ceiling to Rs 6 lakh crore from Rs 30,000 crore, RBI is unlikely to continue to apply the incremental cash reserve ratio.

In order to manage liquidity conditions, RBI on November 28 had asked banks to maintain an incremental CRR of 100 per cent on deposits accrued between September 16 and November 11, 2016.

The temporary hike in CRR due to high deposits with banks is not a concern, but RBI should cut repo by 0.25 per cent to 6 per cent in next policy review in December to adjust balance between high liquidity and interest rates, Yes Bank said.

According to SBI, there is an expectation that the inflation in November will be below 4 per cent.