Rate cut hopes high

Economists predict the benchmark interest rate to be lowered by 25 basis points

Finance Minister Arun Jaitley and his Economic Advisor Arvind Subramanian have once again called for a repo rate cut, thus mounting pressure on RBI Governor Raghuram Rajan. While Jaitley is expecting a rate cut like any other Indian, his advisor asserts the government is ready to face price rise, if any, and claims there are enough stocks in government warehouses.

It is an assurance to Rajan should he decide on the rate cut. Both the industry and the government want it to happen. Interestingly, even the polls organised among economists pointed to a rate cut opportunity on the policy meet day i.e., June 2. The economists predict the benchmark interest rate to be lowered by 25 basis points, and they also expect another rate cut before December. However, they say the regulator’s policy statement may be of a cautious tone.

On the contrary, if the regulator holds back the rate cut again, it may get lesser chances to meddle with the policy during the monsoon rains and due to any US rate hike later. It already cut rates twice this year, as it felt comfortable with the falling inflation. It left rates unchanged in the April meet, claiming that the banks need more time to pass on the benefit to its customers. Rajan even expressed his ire at the bankers over this; and it made them fall in line.

It is seen as the best opportunity for the Reserve Bank to take a call on the rate cut now as oil prices are still at low level, thus helping to contain inflation well below 6 per cent level – the upper limit fixed by the Reserve Bank. Even failure of rains leading to poor crops will not trouble the government as it maintains enough food stocks, according to Subramanian, to check rise in prices of essentials.

The current economic data shows consumer inflation at a 4-month low of 4.87 per cent in April, and the industrial output at a 5-month low. It means a serious disinflationary trend is prevailing in the country. Though, there is no immediate threat to rupee, more uncertainties are seen beyond June, say economists. Further, the data for the January-March quarter is due on Friday, which is expected to show some weakness, pushing the Reserve Bank to prepare for another rate cut later, somewhere in September.

On the other hand, if Governor Rajan decides to hold rate cut this time, the strengthening of US economy would push US Federal Reserve for a rate hike, thus mounting heavy pressure on other currencies, including rupee. Although, Rajan claims that India is better placed to face any eventuality from US rate hike or global debt crisis, hopefully, he will take a rate cut decision during this policy review.