On Wednesday, the Reserve Bank of India will come out with its first monetary policy review, since the country’s economy unexpectedly slid to a three-year low of 5.7% in the April-June quarter.
The government and the industry are looking up to the RBI for an interest rate cut.
Chief Economic Adviser Arvind Subramanian has been at the forefront on behalf of the government to demand a rate cut by RBI in the wake of private investment falling abysmally low. Finance Minister Arun Jaitley too had made his mind clear time and again that the interest rates need to be lowered. But the RBI, which has obliged with a 25 bps rate cut in its last policy review in August, is facing a situation where inflation has risen almost 200 basis points since June, the last data-point the central bank worked upon before giving a rate cut in August.
Therefore, a majority of economists are working on the premise that the RBI will maintain a status quo ante. Global financial services major Morgan Stanley too has predicted a pause this time around.
The RBI reduced the repo rate 6% in August, citing reduction in inflation risks. The rate cut was the first in 10 months and had brought policy rates to a near seven-year low. That has not happened, and the retail inflation in August moved to a five-month high of 3.36%. But the price rise was driven by a seasonal spike in vegetables, which will be contained going forward. However, the doubling of house rent allowances by the Centre could keep the inflation high till about the end of this year, according to estimates. This would also keep inflation expectations of households on a higher side. This is enough reason for RBI to pause on the rate hike. But, the September quarter has also ended without giving any semblance of the economic growth having picked up. The demonetisation and GST hiccups are yet to moderate. The growth in the economy is falling at a time when the major economies of the world are showing strength.
Stung by the slowdown criticism, the government is planning to hand out a stimulus package to the economy to refuel growth. In this scenario, the RBI does have room to cut at least 25 basis points again in its policy review on October 4, and this could be the last cut before the year-end.
A handful of analysts have felt that if the government has promised RBI Governor Urijit Patel to kick-start stalled projects, generate economic activities and remove teething troubles in GST during the pre-policy meeting, Patel may oblige with a back-to-back rate cut.
Industry body CII has called for 100 baiss points rate cut, while Assocham has written to the RBI and the Monetary Policy Committee for at least a 25 basis point cut.
