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RBI may cut Bank Rate by 50 basis points

The Reserve Bank of India is expected to lower its benchmark bank rate, tracking rate cuts overseas, a Reuters poll showed on Thursday.

Eleven of 14 bankers, primary dealers and analysts, polled one day after the US Federal Reserve cut its benchmark short term interest rate, expected the Reserve Bank of India to lower the bank rate by 50 basis points from 7 per cent.

The remaining three expected a cut of 50-100 basis points.

The poll participants were less sure of the timing but all said the RBI would reduce the bank rate before the end of September.

The bank rate is the rate at which the RBI offers most of its refinancing to commercial banks and primary dealers and is used as a benchmark by banks to price their loans.

Indian markets have been speculating on a central bank rate cut since the Fed's earlier cut in May. Bond yields, currently just off historic lows, have already discounted a possible half point cut in the bank rate, debt traders say.

The benchmark rate has been cut twice this year, by a half point each in February and March.

Analysts say a slowing economy badly needs a stimulus and feel that current economic factors give the RBI leeway to conduct an easy monetary policy.

Inflation is benign, the rupee is stable and lower rates overseas would allow the central bank to reduce domestic rates without affecting foreign capital inflows, they said.

Even if there were a brief interruption in capital inflows, a record level of foreign exchange reserves provides enough buffer for the central bank to weather any possible hiccups, currency traders said.

One factor which could weigh on the central bank's mind was the government's profligate spending habits, one analyst said.

The analyst, who did not want to be named, said the immediate beneficiary of lower rates would be the government.

"Companies will no doubt benefit from lower rates but there is no indication right now that there is any significant demand for loans from the industry," he said.

"So the main immediate gainer is likely to be the government and it may therefore be more prudent to wait and see if it is controlling its spending before cutting rates," he said.

The analyst expected the RBI would wait till parliament decided the fate of pending legislation aimed at reducing the country's stubborn fiscal deficit.

Parliament, currently in recess, is expected to discuss the fiscal legislation in July.

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