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Bankers divided on rate cuts

BS Banking Bureau in Mumbai

On the eve of the mid-term credit policy, the banking community is vertically divided on whether the Reserve Bank of India will cut the benchmark bank rate, repo rate and banks' cash reserve ratio.

A majority of bankers, however, felt that a cut in the savings deposit rate is fairly certain. There is a consensus among bankers that the RBI will cut gross domestic product growth projections to 5-5.5 per cent, down from 6-6.5 per cent outlined in the April credit policy.

Business Standard spoke to 24 bankers on the eve of the policy, ranging from CEOs to treasury heads. As the day progressed, the number of bankers who believed that a rate cut is in the offing increased. But bond traders waited on the sidelines and refrained from taking positions as uncertainty gripped the market.

Eleven out of the 24 bankers contacted said a 50 basis points bank rate cut (from 6.5 per cent to 6 per cent) is expected. The 11 said that along with the bank rate cut, a 25 basis points repo rate cut (from 5.75 per cent to 5.5 per cent) is also likely.

However, two-thirds of the respondents (16 out of 24) expected only a cut in the repo rate and no bank rate cut.

They also added that the RBI may not use the policy platform to announce the repo rate cut which can even be done on October 30.

Ten of the 24 repondents were in favour of a 50 basis points cut in CRR (from 5 per cent to 4.5 per cent) in two stages even though there is enough liquidity in the system.

On whether the RBI would try and cut savings deposit rates, 15 out of 24 respondents said "yes". They are expecting at least a 50 basis points cut in the savings deposit rate, from 4 per cent to 3.5 per cent.

All the 24 respondents said the RBI would cut the GDP growth rate projection. While 20 of them said it would be pared from the 6-6.5 per cent outlined in the April policy to 5-5.5 per cent, four of them said the cut will be less severe -- to 5.5-6 per cent. The GDP grew by 5.4 per cent in 2001-2002.

On the rationale of the rate cut, the banking community is vertically split. While one school of bankers felt that with all macro economic indicators stable, the RBI must cut rates to push growth, others said that the central bank should not upset the applecart of stability at this point of time.

The bond market, meanwhile, has discounted the cuts and dealers said bond prices will go down sharply, pushing up yields, if there is no rate cut.

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