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No immediate move on rate cut, says RBI

The Reserve Bank of India said on Friday it would not immediately follow the United States in cutting
interest rates.

"We have always indicated this would be one of the factors that would be closely monitored, but as in the past the actions of the central bank in India are not correlated to the actions of the US Fed," Reserve Bank of India Deputy Governor Y V Reddy said on a visit to Colombo.

Reddy said domestic factors such as gross domestic product growth and government borrowing would weigh heavily in deciding whether to make any rate cut, and added they were all basically on track.

The RBI's benchmark rate has been cut twice this year, by a half point each in February and March. It has not been below its current rate of 7.0 per cent since 1973.

The US Federal Reserve cut its benchmark short-term rate by a quarter of a percentage point on Wednesday to 3.75 per cent.

Indian markets have been speculating on a central bank rate cut since an earlier Fed 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.

Reddy said GDP growth was still expected to be in the range of an earlier forecast of 6.0 per cent to 6.5 per cent.

"We have to wait for the monsoons before we take a view of how this is going, but as of now we don't see any reason to seriously consider any review of the estimate," he said.

Reddy also said the RBI was also watching the government's borrowing programme.

"Usually at the beginning of the fiscal year, the borrowing programme is slightly on the higher side. We are seeing the same pattern, though in the first couple of months, (its) marginally higher than usual, but as of now there is no indication that there is any revision in the estimates," he said.

"So we are proceeding on the assumption of the budgetary estimates," said Reddy, who earlier this month had his appointment extended for another two years.

When the RBI unveiled its monetary policy for the year in April, it warned the markets to be prepared for a tightening in monetary policy if conditions warranted.

A Reuters survey released on Thursday showed that bankers generally expected a cut in the benchmark bank rate, tracking rate cuts overseas.

Eleven of 14 bankers, primary dealers and analysts, polled one day after the US Federal Reserve cut its short-term interest rate, expected the RBI 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 short-term 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.

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