Repo rate cut by RBI would be ineffective: HSBC

15 Jun 2012, Reuters.

NEW DELHI: A cut in India’s repo rate would be “ineffective” given the liquidity deficit in the country, and would be “the wrong medicine” to boost growth, HSBC said in a note on Friday.

“We think deeper structural reforms are needed instead, and soon,” HSBC wrote.

It also warned that inflation pressures will continue “simmering” on the back of a weak rupee and “tight” capacity, despite the fall in oil prices and moderating growth.

HSBC added that it expected RBI “to continue to manage liquidity conditions actively” via open market operations, and did not rule out additional OMOs or cuts in the cash reserve ratio.

The Reserve Bank of India is widely expected to cut the repo rate by 25 basis points at its policy decision on Monday, with views split on whether it will also deliver a cut in the CRR.

Earlier, broking house CLSA said the RBI has “no room” to cut interest rate after WPI inflation was revised upwards in March, making it “a foregone conclusion” that the April and May data will also be revised upwards.

CLSA did not rule out “a small” cut in the cash reserve ratio after WPI core inflation for May was “stable” at 4.8 percent, as per its calculations.

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