Published: Wed, August 02, 2017
Business | By Max Garcia

RBI monetary policy: Five things MPC may consider for a rate cut

RBI monetary policy: Five things MPC may consider for a rate cut

Citing its survey on inflation, the RBI said households seem to have discounted the recent low inflation prints; their three months and one year ahead inflationary expectations polled in the RBI survey in June have "somewhat hardened". Four members of the panel voted in favour of reducing the key lending rate.

This development comes against the backdrop of the government, economists and lenders pushing hard for a rate cut which the RBI has held since October a year ago when Urjit Patel had announced a 25 bps cut in his first policy review as RBI governor.

"Excluding the HRA impact which will affect the CPI cumulatively, inflation would be a little over 4 per cent by fourth quarter as against 4.5 per cent inclusive of the HRA in the June statement (of RBI policy)", Patel said. He said that core inflation, abandoning volatile food prices and administered prices, continued to slow to 3.05 per cent in July on yearly basis compared with 3.31 per cent, indicating weak people's buying power.

India Inc has been rooting for a rate cut for quite some time. For the present though, the RBI ought to change its stance, stand up and deliver a rate cut that will stimulate growth in the economy. Final festive season of this calendar year is nearing and this rate cut can allow the banks to cut down on their lending rates further.

Of the 15 economists surveyed by Mint, 11 expect the central bank to cut the repo rate-the rate at which the central bank infuses liquidity in the banking system (or lends to banks)-by 25 basis points. The central bank last cut its key interest rate in October 2016.

RBI had previously warned that inflation could accelerate due to a seasonal rebound in food prices and other factors like pay hikes for government employees. Subsequently, the reverse repurchase rate, or the short-term borrowing rate, has been adjusted to 5.75 per cent from 6 per cent.

Assocham said that even though the 25 bps cut "may not make much of a difference" to the debt servicing burden of the borrowers, especially the over-leveraged corporates, "it certainly improves the sentiment". Further, the industrial growth continues to remain subdued. Indian stocks are trading at a record high, partly in anticipation of that. The index was at an encouraging eight per cent in the same month a year ago. It had vouched to keep a stronger watch on inflation levels before deciding on the rate cut. Is there still a case for a decline in interest rates?

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