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Why ‘no rate cut’ this time?
Why ‘No Rate Cut’ This Time. The Reserve Bank of India (RBI) is meeting on December 2 to review its quarterly monetary policy, which became the focal point rising hopes on interest (repo) rate cut. The industry and government claim that the rate cut would attract more investment and push the growth.
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The Reserve Bank of India (RBI) is meeting on December 2 to review its quarterly monetary policy, which became the focal point rising hopes on interest (repo) rate cut. The industry and government claim that the rate cut would attract more investment and push the growth.
In its last monetary policy, the banking regulator did not cut the repo rate, expressing it is difficult to achieve 6 per cent CPI inflation by January 2016, as was targeted in its plan.
However, surprisingly the recent developments at global and domestic level, such as fall in the fruit and vegetable prices estimated a fall of about 1.5 per cent, fall in the global crude oil prices to $70/barrel, thus helping the oil marketing companies to down the fuel prices, etc, have enhanced options for the apex bank to make a position decision by settling for a rate cut this time itself.
The market analysts (supporting the rate cut) further reminding that even China had initiated cut its deposit rates by 25 basis points. And it is the turn of India to act. Also the Finance Ministry had expressed that the RBI would consider all the favorable issues while taking the rate cut decision, thus hinting a rate cut.
Now the question is, whether the RBI favours a interest rate cut and is it appropriate?
A section of analysts (not supporting the rate cut) suggest that there is a need for utmost caution. They point out that the present fall in the inflation (4.5%) is just a base effect and once the effect goes the inflation would move back to its original status at 7 per cent, which may be likely to happen in December 2014.
They further argue that, the average food inflation is sticky at around 10 per cent for the last five years and the rupee has not depreciated so much the Dollar Index increased, which means that the Indian exports would be less competitive and Rupee, if any risk-off trade, would depreciate very quickly, impacting on the current account deficit (CAD).
Thus, it is proper for the RBI to exercise caution and even wait till some more structural reforms takes place from the government’s side, especially in terms of tackling the food inflation.
Hence, there is much likely that there may be no reduction in repo rate in the immediate review but it may come only in April 2015 review.
