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Falling prices may make RBI cut rates
MUMBAI: The sharp decline in food and vegetable prices last month and the eventual move toward the RBI’s targeted inflation rate of 5% by March 2017 has raised the
MUMBAI: The sharp decline in food and vegetable prices last month and the eventual move toward the RBI’s targeted inflation rate of 5% by March 2017 has raised the bets for a cut in interest rates. The RBI will review the monetary policy in October and December.
The retail inflation figures, released by the Centre on Monday, for August declined to 5.05%. Inflation in July was 6.07%.
The Reserve Bank of India, which considers retail inflation as the key factor while deciding policy rates, will get more room to cut rates to aid growth.
Industrial growth or the index of industrial production (IIP) data also contracted by 2.4% in July. This may prompt the RBI to make it easier for banks to borrow money. This will reduce borrowing costs for banks, which can then pass off the reduction to customers.
This is the last set of data released on retail inflation and industrial growth, ahead of the next bi-monthly monetary policy to be announced by the new RBI governor Urjit Patel on October 4.
Soumya Kanti Ghosh, chief economic adviser to India’s biggest lender State Bank of India, said, “Given the current stage of credit growth, we expect a reduction of 50 basis points in one go, rather than baby cuts of 25 basis points… We have maintained that retail inflation will remain below 4% or just above 4%.”
The government inflation target is 4% plus or minus 2% for the next five years.
In a report, Ghosh has also said, “Though the rate cut may occur either in October or December, we believe the possibility of a rate hike by Fed in December may prompt the RBI to cut rates in October.”
It continues to expect a 0.50% repo rate cut by March 2017 and that RBI will continue to inject liquidity for rate transmission by banks from October to March.
At present, repo rate or rate at which banks borrow from the RBI is 6.5%. Since January last year, the RBI has cut repo rate by 1.5%, whereas the banks have cut loan rates by only 0.6%.
On similar lines, CRISIL’s research suggests that “after the RBI kept its policy rate unchanged at 6.5% at its August 9 meeting, the chances of a rate cut in October rose. But the RBI might choose to wait for some more time before wielding the knife. We expect the average CPI to stay close to 5% this fiscal.”
