RBI may go forn100 bsp reduction in CRR

Mumbai, Aug 04

The Reserve Bank of India is likely to go for a reduction in Cash Reserve Ratio by 100 basis points, post three-day monetary policy meeting, which began today.

If it happened so, the step will help the banks pass on reduced interest rates to borrowers.

Talking to Bizz Buzz, M Narendra, former CND, Indian Overseas Bank says, “The proposed reduction of CRR by 100 basis points as decided earlier may also help the banks pass on reduced interest rates to borrowers. It is therefore expected currently RBI may go for status quo without further reduction in repo rate.”

Currently the headline inflation is at the comfortable level much below the target inflation of 4 per cent and these factors had led RBI earlier 50 basis points reduction in repo rate in the last monetary, by front loading the big reduction along with earlier repo rate cut of 25 basis points each in earlier two policies. These reductions are in the process of transmission into lending rates. Similarly, these rep rate may get a benefit for giving necessary lift to India's GDP growth. However, the uncertainty in geo political tensions and particularly trade tensions with particularly recent imposing of higher Tariffs of 25 per cent by USA on Indian imports with effect from August 1 will have an impact partially on India's GDP consequence of impact of our exports to USA. It is expected that Government of India will be able to finalize the ongoing trade agreement with USA on better terms and these higher tariffs of 25 per cent may be reduced substantially. RBI in view of these uncertainties, may provide special package for exporters apart from Government support.

However, a section of experts believes that RBI may go for further reduction in Repo Rate by 25 bsp this time too.

Mandar Pitale, head, financial markets at SBM Bank India, says, “The RBI August Monetary Policy review is coming at the backdrop of uncertainties on tariff policy and their implication for growth and inflation. The immediate macro impact of tariffs would be through the uncertainty and sentiment channel, as the timing and nature of any trade deal remain uncertain.”

Even in case of an eventual deal, US tariffs that will finally get imposed on India are likely to be closer to the tariffs offered to other Emerging Market Asian countries (15-25 per cent range) and will add to downside risk to growth, he said.

Average CPI inflation in FY26 is expected to converge near 4 per cent. Though CPI is expected to be benign till Q3 FY 25-26; it will take U turn in Q4 and likely to hover near 5 per cent by the end of Q1 FY 26-27 with unfavourable base effect kicking in.

Thus, Pitale said, if the likelihood of Policy Rate Hiking Cycle beginning by Q2 FY 26-27 needs to get factored in; then the upcoming August policy review will be an opportune time to deliver 25 bps cut driven by low inflation and downward risk to growth.

This will fulfil twin objectives of providing further impetus to growth and a reasonable gestation period for effective and efficient monetary transmission before beginning of hiking cycle.

EoM.