With little room for rate cut, Subbarao in a bind | india | Hindustan Times
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With little room for rate cut, Subbarao in a bind

india Updated: Jun 17, 2012 22:43 IST
HT Correspondent

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

Climbing inflation — it was 7.55% in May — 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 who track India say RBI could cut interest rates but it may not be effective enough to control prices without hurting growth further.

“It is possible that the RBI cuts repo rate further on Monday by 0.25 percentage point,” said Chetan Ahya of Morgan Stanley India. “However, we believe that monetary policy will be less effective in dealing with the effects of a stagflation-type environment.”

Over the last couple of weeks global think-tanks have warned that India faces that real possibility of slipping into a “stagflation” — an economic situation characterised by flat income growth, persistent high prices and growing unemployment over a sustained period of time.

Moreover, even if the RBI slashes the repo rate — the rate at which it lends to banks — don’t expect your equated monthly installments to come down immediately. Existing home loan borrowers who have borrowed money on floating rates will have to wait longer before banks actually bring down their EMIs as banks first offer reduced interest rates to new customers.

Business leaders have been demanding a cut in interest rates to tend companies injured by slumping demand, high borrowing costs and rising commodity prices. In April, the 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 Monday. “The RBI is yet again faced with the unenviable task of balancing growth and inflation objectives,” said Kamalika Das, economist at ICICI Bank. “We expect a 0.25 percentage point reduction in repo rate.”

Moody’s Analytics, an arm of US-credit rating agency, last week said India’s economy is in stagflation, with notably weaker growth but inflation still stubbornly high.

Likewise, Morgan Stanley has cautioned that a "stagflation-type" environment was emerging in India, while Japanese broking and research firm Nomura said "India was going through its own version of stagflation."