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The Finance Ministry has not lost hope of a rate cut, despite no such announcement coming in the monetary policy review on Tuesday. The Ministry expects the RBI to cut rates next month.
“September would be a major decider in terms of monetary easing because we would have a clear picture by then in terms of the monsoon situation and also clear picture on Fed rate hike decision,” a top Finance Ministry official said here.
The Ministry appears to have taken a cue from the RBI’s statement about conditions for monetary policy action in the coming days. The conditions include fuller transmission of previous rate cuts by banks, developments in food prices and their management (especially the effects of monsoon, while looking through both seasonal as well as base effects), policy effort to boost investment and kick-starting of stalled projects, and signs of normalisation of the US monetary policy (basically action of Federal Reserve on rates).
On Monday, the India Meteorology Department (IMD) stuck to its South-West monsoon forecast at 88 per cent of the 50-year long period average (LPA) of 89 cm, raising El Nino concerns from ‘weak’ to ‘moderate’. This can affect yields of kharif crop, with a cascading effect on inflation. This issue was highlighted by the RBI in its previous policy and even now plays a key role in revising the rate.
The issue about transmission of rate cut has not just been highlighted by the Finance Ministry but also by the RBI. Even on Tuesday, the policy review mentioned that since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points in rate cuts so far. However, the RBI hopes that as loan demand picks up in the October-December quarter of the current fiscal, banks will see more gains from cutting rates to secure new lending, and more transmission will take place. The Finance Ministry feels that among the four conditions for monetary policy action in the coming days, action by the US Federal Reserve will play a key role. The Federal Open Market Committee, the monetary policymaking body of the Federal Reserve System, is scheduled to meet on September 16 and 17 to take a call on hiking rate. Any such decision will have an impact on the Indian equity market as well as on the rupee. Following this, RBI action will be warranted, the official said.
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