Notwithstanding the better-than-expected inflation and industrial production numbers of late, most economists, however, feel that central bank will wait until January to cut interest rates.
Deposit growth has hit a nine-year low, slipping below 13% in the fortnight ended November 30, as against 15% projected by the RBI for 2012-13. Over the last two years, deposit growth has fallen from around 17% to 13% as customers left them for other assets like realty and gold because high inflation shaved off returns. If bankers are to be believed, deposit growth is unlikely to improve significantly during the rest of this financial year. The widening gap between deposit growth and credit growth has resulted in the liquidity deficit increasing. The RBI endeavours to keep liquidity in deficit of 1% of banks deposits so as to avoid crimping credit offtake.
Credit growth was a healthy 17% until November as projected by the central bank while deposit growth fell to 12.76% in the fortnight ended November 30.
According to Bank of America-Merrill Lynch, current deposit growth is insufficient to meet credit offtake. On our part, we expect the RBI to cut the CRR, the bank said in a note.
Banks borrowings from the RBIs repo tender, a loose gauge of systemic liquidity, hit R1.29 lakh crore on Friday. While part of the surge in the borrowings can be attributed to last-minute efforts at meeting the fortnightly CRR mandate, liquidity deficit has indeed worsened despite the central bank pumping in money through bond purchases, economists said.
The RBI has resumed bond purchases under open market operations since December and has infused around R23,000 crore.
Indranil Pan, chief economist at Kotak Mahindra Bank, said that with bond supply thinning out towards the end of the year under the government borrowing programme, OMOs of the central bank may also be fewer. However considering the liquidity situation, another CRR cut was warranted.
The CRR cut done in October is clearly not enough to reduce the liquidity deficit, said Pan.
While the RBI perhaps will allay worries over liquidity through a CRR cut, most analysts expect it to keep its policy rates unchanged notwithstanding the fall in Wholesale Price Index inflation in November to a 10-month low.
Consumer price inflation is still close to 10%, current account deficit worries remain. There is no compelling reason to cut rates in December, said Pan.
Further, in its second-quarter policy review in October, the RBI had said that the likelihood of rate cuts during the January-March quarter had gone up with inflation easing.
Shubhada Rao, chief economist at Yes Bank, said that the RBI would prefer to watch core inflation closely for some more time. The trajectory of inflation has been shaken after the sharp fall in November. The RBI would watch it more closely, she said.
The RBI has projected inflation to fall to 7% by March end. Inflation was 7.24% in November.
The worsening liquidity deficit gives reason enough for a CRR cut, feel analysts. But Tuesday will tell whether the central bank can afford to wait on rate cuts.
* Faltering deposit growth, liquidity situation likely to prompt CRR cut by 25 bps
* Deposit growth has hit 9-year low, slipping below 13% in the fortnight ended Nov 30
* RBI endeavours to keep liquidity in deficit of 1% of banks deposits
* RBI has infused around R23,000 cr since December through bond purchases
* Economists feel that the central bank would wait until January to cut interest rates