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The RBI had taken a strong step in its April policy announcement by cutting down the repo rate by 50 basis points (bps).
Some of the current data suggest that it may not be time for a further rate cut. Key ones among them are the persistent inflationary environment in the near term and sharp depreciation of the rupee resulting in higher costs of imported products.
If the RBI lowers the rates it could lead to a weaker rupee that could further accentuate inflation, as the country is heavily dependent on oil imports.
Though the global commodity prices have been falling in the recent past, for the benefit of lower prices to reach the consumers, the currency movement has to be kept under check.
However, one can take heart considering that there are as many reasons for the regulator to cut the rates as there are for not doing it.
The positive effects
Any rate cut from here is likely to boost sentiment, and could lead to a boost in investments and lubricate the engine of growth. The GDP rate is at a nine-year low and the monthly IIP numbers are not doing justice to our potential. The core inflation is expected to come down and global commodity prices are also lending a helping hand. The opportunity is too large to ignore and it requires right policy direction. The RBI has always been ahead of the curve and we expect it to continue to be so.
More recently, our Asian peer, China, also cut down its rates for the first time since December 2008, to boost its flagging growth on various fronts. On balance, we expect a deep cut from the regulator to ensure that the Indian growth story comes back on track.
Rate cut from here would spur growth as well as improve investor confidence. A combination of repo rate and CRR cuts will help banks pass on the benefits of rate cut to the end-consumers which could catapult growth. This together with the much needed policy reforms, which now need a nod from the Centre, are required to avoid deeper supply-side concerns.
(The author is MD and CEO, Federal Bank.)
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