The markets will be in for a surprise if the Reserve Bank of India, post demonetisation of high-value currency notes, does not cut policy rates at its monetary policy review meeting on December 7, State Bank of India managing director Rajnish Kumar said on Monday.
Though the bank was preoccupied with dealing with surge in deposits and long queues of people for withdrawal of cash in the wake of demonetisation, the planned merger of associate banks and the Bharatiya Mahila Bank with itself was on track, Kumar said.
“It is very difficult to predict because the monetary policy committee now decides. May be, like 25-50-basis-point cut is what everybody is expecting and no rate cut will be a bigger surprise,” said Kumar on the sidelines of the Inclusive Finance Summit.
If the incremental cash reserve ratio (CRR) comes down, it would help banks pass on the benefit to customers, he said.
With surge in deposits flooding the banking sector with liquidity, the RBI ordered banks to maintain 100% CRR on incremental deposits between September 16 and November 11, amounting to R3.66 lakh crore.
Banks have expressed displeasure over the move as it deprives them of any income from these funds. After a sharp increase in the ceiling of the market stabilisation scheme to Rs 6 lakh crore from Rs 30,000 crore last week to absorb excess liquidity in the system, the central bank might withdraw the incremental CRR imposed on banks.
Analysts have predicted a rate cut by the monetary policy committee. “Scope of food inflation dragging headline inflation lower also keeps the door open for an easy policy bias. These are likely to prod the MPC to consider a 25-bps rate cut on Wednesday, followed by another cut in 1Q 2017,” said Radhika Rao, an economist with DBS Bank.