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HindustanTimes Sat,30 Aug 2014

All eyes on RBI guv: will he cut rates tomorrow?

HT Correspondent, Hindustan Times  New Delhi, July 29, 2012
First Published: 20:54 IST(29/7/2012) | Last Updated: 22:24 IST(29/7/2012)

Home loan borrowers, business leaders, economists and policy makers: all seem to have one question in common: Will the Reserve Bank of India (RBI) governor D Subbarao announce a cut in interest rates on Tuesday?

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Elevated inflation — at 7.25% in June — has made the task difficult for Subbarao and his team battling to prescribe policies for an economy nursing multiple wounds inflicted by politics-induced policy logjam, high prices and a shaky world economy.

Economists said the RBI may not cut interest rates and tilt in favour of price control in the classic textbook growth-versus-inflation dilemma.

“Monsoon failure is going to pose further challenges to policymakers,” Samiran Chakraborty, regional head of research, south Asia, Standard Chartered Bank, told HT. Monsoon rains, critical for summer-sown crops, have been 21% deficient so far this year.

“Fiscal space is anyway limited to pump-prime and RBI’s resolve to stick to its anti-inflationary stance will be tested,” said Chakraborty.

Business leaders have been demanding a cut in interest rates to tend to companies injured by falling demand.

In April, the Reserve Bank of India (RBI) had slashed the repo rate by 0.50 percentage points to 8% and industry leaders have been rachetting up their demand for a repeat action on Tuesday.

A higher repo pushes up banks' borrowing costs prompting them to increase interest rates for final home, auto and corporate borrowers.

India’s retail prices are already high. On a year-on-year basis in June, vegetable prices rose the sharpest at 28%, while milk and allied products shot up 13.2%. Oil and fats rose 16.4%. Non-alcoholic beverages, like your can of soft drink, rose 9.54%. Prepared meals’ prices — a proxy for restaurant rates —rose 9%. Eventually, high food inflation hits the overall economy and that had prompted the RBI to keep interest rates high to suppress prices.

High borrowing and raw material costs, however, have hit companies which have deferred capacity expansion plans hurt job prospects and eroded overall economic growth.

During January to April, India's gross domestic product (GDP) grew 5.3% from a year ago, the slowest quarterly pace in a decade, taking the steam out of what was the few engines of global growth.

“With the poor start to this year's monsoon threatening a further ratchet effect on food prices, our base case remains for the RBI to stand pat on rates at its upcoming monetary policy review,” said Richard Iley, chief Asia economist, BNP Paribas.

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