Chorus for rate cut grows more strident

  • HT Correspondent, Hindustan Times, New Delhi
  • Updated: Dec 01, 2014 00:15 IST

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

Wholesale inflation touched a five-year low of 1.77% in October. Likewise, retail inflation is at a three-year low of 5.52%.

These could decline further, on the back of falling petrol and diesel prices after OPEC—the cartel of oil producing countries—decided against an output cut despite 4-year-low crude prices.

Finance minister Arun Jaitley has expressed hope that RBI will move in the direction of making the cost of capital reasonable to help perk up economy. Rajan may meet Jaitley on Monday.

RBI uses monetary tools to stymie demand and cool prices. Many analysts, however, believe that the central bank would rather wait till the beginning of 2015 before it starts slashing borrowing rates, which are unchanged since January 2014.

“We think the first rate cut (of the repo rate) is likely to be in the February monetary policy or at the latest by April 2015,” investment banking major Morgan Stanley said in a recent report.

The repo rate is the rate at which RBI lends to banks. A higher repo pushes up banks’ borrowing costs, prompting them to increase interest rates for final home, auto and corporate borrowers — and vice versa. It currently stands at 8%.

The manufacturing sector crawled at 0.1% during July-September, latest national income data released on Friday showed, as business leaders demanded lower borrowing costs to aid a much-needed industrial revival.

“Given the current inflation situation RBI should ease the monetary policy stance as this would boost investment sentiment,” Sidharth Birla, president of industry body Ficci has said.

“The RBI is likely to tone down its hawkish policy rhetoric,” Barclays said in a research report.

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