RBI expected to cut key lending rates to spur growth

June 17th, 2012 - 6:04 pm ICT by IANS  

Pranab Mukherjee Mumbai, June 17 (IANS) In a bid to spur growth and boost consumer sentiment, India’s central bank is expected to cut key lending rates by 25-50 basis points in its mid-quarter review of monetary policy 2012-13 on Monday.

The pressure on the Reserve Bank of India (RBI) to cut rates has emanated out of recent data which has shown that the economy continues to face the problems of high inflationary pressure and low growth.

As per the data released by the Central Statistics Office last week, India’s industrial output grew marginally by 0.1 percent in April due to poor show of capital intensive mining and manufacturing sectors.

The factory output, measured in terms of the Index of Industrial Production (IIP), had declined by 3.5 percent in March, the first such contraction in factory output since October 2011, when it shrank by 4.7 percent.

The sharp fall in factory output is expected to put pressure on the apex bank to cut key interest rates (cash reserve ratio (CRR) and short term lending rates) by any where between 25-50 basis points to allow banks to cut interest rates reducing the monthly burden on consumers.

Sectors such as banks, auto and realty are set to gain from the move. As basis points (at which rate RBI lends short term funds to banks) are cut, so will the interest rates charged by banks on loans given to consumers.

A cue for the RBI came from Finance Minister Pranab Mukherjee who exuded confidence that the apex bank will “adjust” the monetary policy to ease macro-economic concerns of slow growth and high inflation.

“I am confident keeping in view all the factors, they (RBI) will adjust the monitory policy,” Mukherjee said Saturday.

“The basic strategy should be to stimulate the domestic demand,” he added.

The gross domestic product (GDP) had slowed to a nine-year low of 5.3 percent in the last quarter of the 2011-12 fiscal.

However, on the flip side, food inflation re-entered the double-digit zone after a gap of six months in April 2012 and the trend continues in May.

Food inflation rose to 10.74 percent in May as compared to 8.25 percent in the previous month as vegetables, pulses, milk, egg, meat and fish became costlier, pinching the pockets of common people.

The overall inflation moved up to 7.55 percent in May as compared to 7.23 percent in the previous month.

To tackle inflation, the central bank raised its key lending rate 13 times since March 2010 but began reversing the rate cycle by cutting the repo rate (short-term lending rates) by 50 basis points in April.

On the global front, the apex bank will also closely monitor the developing situation in Greece as the country goes to polls Sunday for electing a new central government. The next government will decide whether the country will remain in Eurozone. Greece’s exit from Euro will further put the Eurozone in a deeper crisis and hit the global economy.

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