RBIs January rate cut under cloud

A rate cut which looked imminent in January has now been called into question with the Reserve Bank of India (RBI) saying that it is worried that savers are shifting to non-financial assets like gold and real estate because of very low real returns on financial assets.

The central bank has raised concerns about rising defaults among power companies and that, given the rise in bad loans, banks should look at increasing their provisions for non-performing assets. However, on a more positive note for borrowers, the central bank has strongly countered the International Monetary Fund’s observation that expanding credit would heighten asset quality concerns. RBI has said that the flow of credit to productive sectors of the economy needs to be increased and reductions in statutory reserve ratios have augmented resources for lending.

While RBI has been addressing fund requirements by cutting the cash reserve ratio, it has held back from signalling lower interest rates by reducing the repo rate – the rate at which it lends overnight funds to banks. A cut in the repo rate, which is widely expected in the third quarter review on January 29, would result in banks lowering deposit rate, further discouraging savings.

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