'Interest rate cut would depend on inflation'

RBI rate cut

Indicating that the reduction in key interest rate would depend upon price situation, RBI Deputy Governor K C Chakrabarty today said its comfort level for inflation is 4-5 per cent.

"We are looking for 4-5 per cent inflation which is our comfort level," he said on the sidelines of the meeting of heads of public sector banks with Finance Minister P Chidambaram here.

Inflation, as measured by the Wholesale Price Index (WPI), for the month of October stood at 7.45 per cent, much above the RBI's comfort level.

Concerned over persistent inflation, RBI Governor D Subbarao refrained from cutting benchmark interest rate in half-yearly monetary policy review last month.

However, RBI reduced cash reserve ratio by 0.25 per cent to infuse additional liquidity of Rs 17,500 crore into the financial system.

Accordingly, the CRR or the portion of deposits banks have to park with the RBI now stands at 4.25 per cent, while the repo rate, at which RBI lends to banks, has been retained at 8 per cent.

The reverse repo, at which RBI absorbs excess liquidity through borrowings from banks, remains at 7 per cent.

The central bank in October also raised the March-end inflation target to 7.5 per cent, from 7 per cent projected earlier.

Subbarao had also hinted that inflation could rise to above 8 per cent in the near-term.

The RBI Governor, who had suggested a reasonable likelihood of further policy easing in the fourth quarter of this fiscal year, was evasive on whether he will slash the policy rates in January.

Subbarao had said he might take some action in the next policy review. The third quarter review of monetary policy is scheduled for January 29, 2013.

Talking about the deteriorating asset quality of the banks, Chakrabarty said, "NPA is high, the situation is disturbing but it is not alarming. At some point of time our NPA was 12 per cent."

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