The RBI is expected to enhance liquidity in the sluggish economy by cutting CRR by 50 basis points & repo rate by 25 basis points in the upcoming annual credit policy, which will be announced on Tuesday.Currently, the repo rate stands at 8.5 per cent and CRR at 4.75 per cent. Last month, RBI slashed CRR from 5.5 per cent to 4.75 per cent thus infusing Rs.48,000 crore into the system.
Chief executives of banks, economists and industry captains have urged RBI to go for a 0.25 per cent cut in repo rate and 0.75 per cent cut in CRR to boost the economy. All are concerned about the current slow growth in industrial production, and it is believed that a rate cut would boost investments and enhance factory output. Industrial output growth has slowed to 4.1 per cent in February.
The current high interest rates regime has impacted investments and the GDP growth rate had fallen to a low of 6.9 per cent, the worst since 2008-09. The only consolation is that India’s economy is much stronger than most western economies which are reeling under recession.
Bankers in general say that they believe a rate cut is imperative to address the problem of slowdown and tight liquidity condition. RBI on its part is concerned about the current account deficit gap due to sudden depletion of foreign exchange reserves.Analysts say that they believe the rate cut may revive the economy but high commodity rates and prices of international crude oil as well as inflationary pressures could spoil the genuine objectives.