Moderating inflation has raised hopes of rate cut by the Reserve Bank in mid-quarter review of monetary policy on Tuesday, but experts believe that it is more likely to cut the Cash Reserve Ratio for banks.
There has been some tightening on the liquidity front due to advance tax outgo. Following this, the banks' borrowing from the RBI has gone up to Rs 1,46,300 crore, from Rs 64,445 crore on Friday.
Experts say the tight liquidity condition will continue for a while till the government starts spending, and this makes a case for lowering of CRR.
Indian Overseas Bank Chairman and Managing Director M Narendra said, "...as on date since liquidity still has been slightly tight, I think there will be some more support to liquidity (through CRR cut).
"We will not be surprised if there will also be a symbolic repo rate cut now and a major cut in January also."
SBI Managing Director Diwakar Gupta said RBI should consider cutting both repo rate and the Cash Reserve Ratio (CRR). "As a banker I can always say that our wish-list is that rate should change, they should reduce. Both repo and CRR," he said.
Repo is the rate at which RBI lends money to the banks. It stands at 8 per cent at present, leading to a high interest rate regime - much blamed for slowing industrial growth. Cash Reserve Ratio (CRR) is the portion of deposits banks have to mandatorily park with RBI, which is 4.25 per cent now.
"CRR has already been brought down significantly by the Reserve Bank, if they do a little more that will be great. Repo cut will actually bring down rate systematically in the system. So, deposits will be cheaper therefore people will lend cheaper. Overall, there will be a downward bias which has been required," he said.
Inflation declined to 10-month low of 7.24 per cent in November from 7.45 per cent in the previous month, raising hopes that RBI may cut rates to spur growth.
At the same time, the economic growth in the first half of the fiscal fell to 5.4 per cent, as against 7.3 per cent in the year-ago period. The growth in 2011-12 had fallen to a nine-year low of 6.5 per cent.
Asked about the likely RBI's policy action, Chief Economic Adviser Raghuram Rajan said the role of the Finance Ministry or the government is to increase the real side growth. The RBI will look at the monetary side.
Industry leaders have been demanding a cut in interest rate for long to prop growth and investment.
As the inflation is at its 10-month low, it is time for RBI to take measures to ensure that the interest rates are reduced irrespective of tools it may choose to use, Assocham president Rajkumar N Dhoot said.
On concerns of sticky inflation, the RBI had left key policy rates unchanged in its last quarterly review of the monetary policy in October but hinted at easing monetary policy further in the January-March quarter.
"As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher growth trajectory," RBI Governor D Subbarao had said in October policy review.
However, investment bank Goldman Sachs expects the RBI to cut its key interest rate by 0.25 per cent in its policy review following moderation in inflation.
"With both growth and inflation surprising on the downside relative to the RBI's forecast, there is a reason for the central bank to move earlier than its previous guidance," it said.
Union Bank of India Chairman and Managing Director D Sarkar said, "I expect that there should be some reduction in policy rates. It will boost up the sentiment and economic sentiment."
There is expectation that repo rate or CRR could come down by about 25 basis points, he said.