RBI expected to snip policy rate again

First, the Reserve Bank of India has been saying that monetary policy will be in the neutral gear when policy interest rates are two percentage points above the inflation rate.

As regards the price situation, the wholesale price index (WPI) remained in the negative territory for 10 months in a row and stood at (-)4.95 per cent while retail inflation eased to a record low of 3.66 per cent in August. Interest rate swaps signal a cut in the benchmark rate to 7% by the end of 2015.

In the past, the RBI has expressed its concern on lack of policy transmission in the banking industry and has listed this as one of the major conditions for effecting further rate cuts. “We expect a final 25 bps cut in February with inflation meeting the RBI’s under -6% January 2016 target”, said Indranil Sen Gupta, India economist with DSP Merrill Lynch.

Third, it is better if the RBI chooses to take the plunge now rather than later as it is likely that the global financial markets may be in the grips of panic if and when the US Federal Reserve finally raises key rates.

While, the step of cutting down the interest rate would be done with the aim of spurring the economic recovery and alleviate the China’s slowing impact on India.

“The language that RBI uses is very important, specifically on the CPI (consumer price index) trajectory, given the monsoon deficit and wearing-off of the base effect”, Nevgi said.

Owing to a slowdown in consumer demand and a weak global growth outlook, RBI governor Raghuram Rajan may give a “booster dosage” of almost 50 basis points worth of cut in key lending rates while announcing the fourth bi-monthly monetary policy tomorrow.

Even Finance Minister Arun Jaitley last week asserted that common sense says the interest rates should come down. Among 42 economists surveyed by Bloomberg, only 5 are expecting to RBI to maintain current policy, while other expects further cut of 25 basis points to push repo rate at 7%. The GDP growth slipped to 7 per cent in the June quarter.

“I see a 25-basis point rate cut on September 29″.

With the banks being slow in passing on the rate cuts to the consumers and RBI still wary of rising inflation given the deficient monsoon, the central bank till now has adopted a cautious approach. In all likelihood, Rajan will heed to those calls with a small dose of rate cut.