Reserve Bank of India (RBI) governor Raghuram Rajan is widely expected to cut interest rates on Tuesday, a move that will bring down EMIs for home loan borrowers and help companies raise cheaper funds to aid expansion plans.
Inflation rates in India are currently at historic lows. While wholesale price index (WPI) –based inflation fell 4.95% in August, compared to a 4.05% decline in the previous month, retail inflation rose 3.66%, slower than the 3.69% increase in July.
The plunge in inflation rates has triggered hopes that Rajan would likely cut interest rates in the monetary policy review on September 29.
The government has also made it more than obvious that it wants the RBI to cut rates, given the wider elbow room the central bank enjoys from the currently “deflationary” trends in the economy.
Rajan has cut the repo rate—the rate at which banks borrow from the RBI — by 0.75 percentage points in three tranches since January.
Although he kept the rate unchanged in August, the RBI governor kept the door ajar for reducing borrowing costs if inflation remained low and stable.
Corporates and individual borrowers will be hoping for lower borrowing rates to help their plans to buy houses and goods such as cars, which peak during the festival shopping season in October and November, and are mostly bought through loans.
“We expect the RBI to deliver a 0.25 percentage point rate cut at its policy meeting,” said Sonal Varma of Nomura, a research and investment banking firm.
Analysts and policy makers will also be watching for the RBI’s guidance on growth in the broader economy amid chances that the central bank might lower India’s GDP growth projections for 2015-16 from its earlier 7.6% forecast, given deficient monsoon and weak external demand.
Some analysts expect the RBI to maintain a status quo on rates.
“There is a strong reason to keep rates unchanged considering that the concerns the RBI had in the August policy linger even today. In fact the additional information we have is of the kharif crop being less than last year, which will exert pressure on prices,” research firm Care Ratings said in a latest report.
Chief economic adviser Arvind Subramanian has said India was closer to “deflation”, while minister of state for finance minister Jayant Sinha held: “We have to be very mindful and watchful of that (deflation), and that will be put into account when RBI considers its monetary policy.”
Rajan may allude to the description about deflation because it can be reflective of weak economic activity, a sign that people are putting off purchases as their incomes aren’t rising, or are even falling, which may not be borne out by shop-end data.