Almost everybody in India seems to have one question: will Reserve Bank of India (RBI) governor Duvvuri Subbarao announce a cut in interest rates on Tuesday?
Wholesale price-based inflation touched a three-year low of 7.18% in December, but consumer price inflation — a more realistic cost of living index as it captures shop-end prices — has shot up to 10.56%.
The RBI uses monetary tools to try and cool down demand and prices. The tug-of-war between sliding growth and rising inflation — which has forced the bank to keep interest rates high — appear to have hurt consumption demand, which is the foundation of India’s growth story.
Economists expect the RBI to signal a rate on Tuesday.
“We expect RBI to cut repo rate by 0.25 percentage points in the January policy meeting, followed by another 0.50 percentage points by April,” said Deepali Bhargava, chief India economist at broking and research firm Espirito Santo Securities.
The repo rate is the rate at which RBI lends to banks. A higher repo pushes up banks’ borrowing costs, which prompts them to increase interest rates for final home, auto and corporate borrowers. The current repo rate is 8%.
India’s factory output contracted by 0.1% in November, pulled down by poor manufacturing and capital goods output that mirrored weak investment activity. Hit by high cost of borrowing and of raw materials, companies have been putting off expansion plans, which in turn have hit job creation.
The question now is whether Subbarao accedes to the industry’s demand to slash lending costs in the quarterly monetary policy review on Tuesday.
So far the central bank has withstood pressure to reduce borrowing costs to prod consumer purchases and corporate investment.
“We expect the RBI to cut the repo rate by 0.50 percentage points this year, starting with a 0.25 percentage point cut at the upcoming meeting on Tuesday,” said Sonal Varma of Nomura.