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All key indicators — cooling consumer price inflation, sliding global oil prices and economic slowdown — suggest the time may be propitious for a rate cut, but the Reserve Bank of India (RBI) may not oblige when it makes its fifth bi-monthly monetary policy announcement on Tuesday.
Reason: the central bank will want to be sure that the consumer price inflation trajectory is along its projected disinflation glide path of 6 per cent by January 2016.
A substantial thaw in consumer price inflation in September to 6.46 per cent (from 7.73 per cent in August) and a slowdown in GDP growth to 5.3 per cent in the September quarter (against 5.7 per cent in the preceding quarter) have intensified the industry’s clamour for a rate cut.
After hiking the repo rate (the interest rate at which the central bank provides short-term liquidity to banks) from 7.75 per cent to 8 per cent in January, the RBI kept this rate unchanged in its last four bi-monthly monetary policy reviews.
Short-term objectiveThe current consumer price inflation trajectory is consistent with the RBI’s near-term objective of 8 per cent by January 2015. According to Shubhada Rao, Chief Economist, YES Bank, the Governor will opt for a status quo primarily because the results of the latest round of the inflation survey are not out yet. The previous round still showed double-digit inflation expectations.
“The tone of the policy will be dovish. Before the Governor takes a call (on rate cut), he may want to wait for the crude oil prices to stabilise,” she said.
The bond market appears to have front-run a rate cut possibility, with the yield on the 10-year benchmark government security sliding about 45 basis points (its price has risen by about ₹3.6) since September-end. Bond yields and their price move in opposite directions.
NS Venkatesh, Executive Director, IDBI Bank, said the fifth bi-monthly monetary policy announcement could see the RBI prepare the ground for a rate action (cut) in its February review.
By then the RBI will have sufficient data on the retail inflation trajectory, fiscal deficit and tax collection based on which it can decide on the rates. Over the next year, the central bank could cut the repo rate by about 100 basis points to sustain growth, he said.
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