The general market perception is that the central bank might wait till the April credit policy to announce a cut in interest rates. However, if finance minister Yashwant Sinha makes a statement in its budget speech indicating a softening of interest rates, the RBI will be left with no choice but to take the plunge.

The central bank may choose to cut the repo rate to send the first signal of a low interest regime and follow it by a bank rate cut later in the credit policy.

According to a section of treasury experts, the interest rates are expected to ease as the gap between the inflation rate and bank rate has widened with inflation rate ruling low for quite sometime triggering a rise in the real interest rates.

A section ofthe bankers feels that RBI governor Bimal Jalan may not be too keen to signal lowering of interest rates at this juncture when the rupee is under pressure. The Indian currency lost 13 paise on Wednesday against the dollar in a volatile forex market. "If the domestic interst rates fall, banks will be encouraged to arbitrage between the money and forex market which in turn will make the forex market volatile," senior bankers said.

Treasury experts also feel that RBI may not resort to an immediate repo rate cut against the backdrop of the recent fall in spot rupee which has put an upward pressure on short, medium and long term forward premiums. The high premium rates should have a cascading impact on the interest rates, they say.

However, the RBI might cut the repo rate before the end of the current fiscal to save the banking industry from making huge provisioning on account of higher yield to maturity (YTM) of government securities. According to treasury experts, if the current level of yields of gilts doesnot come down, the banking industry may end up making a provision of about Rs 800 crore to mark to market their gilts portfolio.

In fiscal 1998, the YTM on 10-year paper was fixed at 12.15 per cent. Bankers are expecting the YTM on 10-year gilts to be pegged at around 12.25 per cent in the current fiscal.

According to I-Sec debt research head MR Madhavan, "repo rate cut is expected shortly as otherwise most of the banks will end up making provisioning if the yield of gilts continues its upward movement."

A section of the bankers also feels that the sudden volatility on the forex front is a temporary aberration and will be shortly corrected and hence the RBI should not have reservations about a repo rate cut. "The grim economic picture portrayed by the economic survey report, the forthcoming budget and the political uncertainity created panic in the market which weakened the rupee," said treasury experts.