With uncertainty surrounding monsoons and timing of the US Federal Reserve’s interest rate hike, experts believe the possibility of a repo rate cut is very low
New Delhi : With uncertainty surrounding the monsoons and timing of the US Federal Reserve’s interest rate hike, the Reserve Bank of India faces a tough choice on cutting repo rate second time this fiscal to meet government and industry expectations of lowering cost of borrowing to boost growth. With a 25-bps repo rate cut on Jun 2, the RBI had reduced its policy rate by a total of 75 bps in 2015.
Most bankers and experts believe the possibility of an interest rate cut by the Reserve Bank on August 4 is very low as retail inflation remains high. However, India Inc is pitching for a rate cut because of low wholesale inflation and slowdown in industrial growth. Even the government wants the benchmark rate to be cut to prop up growth.
“I am not expecting any rate cut,” SBI Chairperson Arundhati Bhattacharya said. “WPI is (negative) but CPI has gone up a little. Though it is mainly on account of food prices. The RBI has been benchmarking it to the CPI numbers, I think it is unlikely,” she added.
In its June policy statement, the RBI said the risks to its central trajectory for inflation were “tilted to the upside”, and the central bank raised its forecast for headline retail inflation in January by 20 bps to 6.0%, on par with its target for Consumer Price Index inflation for the same month.
However, CPI inflation hit a nine-month high of 5.40% in June, raising concerns that the RBI may not have enough room to cut the repo rate in the coming months as well.
While retail inflation in June rose to an eight-month high of 5.4 per cent, the overall Wholesale Price Index (WPI) based inflation was (-)2.4 per cent in the same month.
RBI mostly tracks the consumer price inflation for its monetary policy decision.
“It would be a status quo. I don’t think there has been much change in the macroeconomic conditions from the last policy. RBI is closely monitoring monsoon.
Nothing indicates that it is a good or a bad monsoon,” Bank of Baroda Managing Director and CEO Ranjan Dhawan said.
Some bankers are of the view that there is a scope for further rate cut by RBI, but if it accommodate in this policy is something in the realm of speculation.
HDFC Bank deputy managing director Paresh Sukthankar said: “… it is difficult to hazard a guess on what move the RBI would be taking on Tuesday, but interest rates are on a downward trend. I expect RBI to cut rates by 25-50 basis points this fiscal.” In its last bi-monthly monetary policy review on June 2, RBI cut repo rate 0.25 per cent for the third time this year.
According to data released by the India Meteorological Department Thursday, rainfall during Jun 1-Jul 30 was 4% below normal. However, rainfall was 21% above normal in the week to Jul 29.
The US Fed’s rate move is also of interest to market observers and the RBI given that it could lead to capital outflows from emerging market economies, including India. The US central bank seems set on a path to raise interest rates in 2015, which investors see beginning in either September or December.
