Pressure is mounting on the Reserve Bank of India (RBI), both by banks and the industry, to cut policy interest rate as well as cash reserve ratio (CRR) on Monday to boost sagging industrial growth.
The clamouring for a cut in interest rate and cash reserve ratio (CRR) has increased in view of declining inflation and the need to arrest fall in industrial production.
However, experts say the declining value of rupee may constraint the apex bank to take bold measures in its mid-quarter monetary policy review scheduled on June 17.
Talking to PTI, SBI chairman Pratip Chaudhuri made a case for a cut in CRR - the amount of deposits which banks are required to keep with Reserve Bank in cash - saying it would give more leeway to banks to provide cheaper credit to borrowers.
"A 25 basis points (0.25 per cent) cut in repo rate will give an additional income of Rs 50 crore. How do I distribute it? (SBI has a loan book of Rs 7 lakh crore). If you reduce the CRR by 25 bps, I get about Rs 3,000 crore. If there is a CRR cut, then the transmission is more pronounced," he said.
Industry body Assocham said most of the risk factors flagged by the RBI in its annual monetary policy have significantly receded "leaving a lot more headroom for the central bank to go in for further cut in the key policy interest rates".
In its annual monetary policy on May 3, the RBI had slashed repo rate (short-term lending rate) by 0.25 per cent, but had kept the CRR unchanged at 4 per cent.
Inflation, a main worry of the central bank, fell to a 43 months low of 4.7 per cent in May.
Industry has been complaining that high interest regime is hurting economic activities. The factory output (IIP) slowed to 2.3 per cent in April from 3.4 per cent in March.
MD & CEO of Icra, Naresh Takkar, however, opined that while the healthy onset of the monsoon has reinforced expectations of easing in food inflation over the near term, the recent rupee depreciation may act as a dampener.
"We expect the RBI to refrain from further easing in the June policy review, despite the weakness in industrial growth," he said.
While the rupee has started to appreciate from lifetime low of 58.98 hit earlier this week, other experts too said that the weakening trend in rupee may keep RBI on wait-and-watch mode on Monday.
"...we cannot rule out the possibility that the RBI may decide to delay the rate cut in light of the recent INR weakness. Following this policy rate cut, the room for additional monetary policy easing is limited and we only expect one more rate cut of 25 bps," Leif Eskesen, chief economist for India and ASEAN at HSBC, had said.
During 2011-12, the RBI had increased repo rate 13 times with an aim to tame inflation, but has reduced the rate by 1.25 per cent since January 2012.
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