Rate cut looks unlikely

N. S. VAGEESH | Updated on March 12, 2018

RBI Governor D. Subbarao…Under presssure

The latest wholesale price index (WPI) inflation numbers for August, at 7.55 per cent, do not really make a case for any cut in interest rates now. If inflation control is still the main objective of the RBI, then the Governor may have to hold his hand yet another time (or refrain from a rate reduction) when he announces his mid-quarter monetary policy review this morning.

There is no doubt that for once, the RBI Governor is under pressure to match the slew of reform initiatives and fiscal steps that the Government has announced in the last three days — the first to step up investor appetite and the second (the hike in petroproduct prices) to reduce the fiscal deficit. There are many who think that he should cut rates now in order to ‘support’ the government’s steps in reviving the slowing economy.


But just read Dr Subbarao’s caution when he effected the 50 bps rate cut in April this year. The Governor had said at the time of his annual monetary policy announcement that he was front loading the rate cuts in the hope of fiscal consolidation — read fuel hikes, cutting subsidies and implementing long-delayed policy measures.

The Rs 5 hike in diesel prices and the announcements on FDI in retail, aviation and power trading are encouraging steps. But given the gap between announcements and implementation, it would be too much to expect the Governor to take the cue and start cutting rates immediately.

The belated diesel price revision, while welcome as an attempt to curb the fuel subsidy bill, may not yield any immediate results in terms of curbing demand. On the other hand, it would almost certainly add a percentage point to inflation numbers over the next few months. Revision in electricity prices has already contributed to an upswing in inflation last month.

Food prices are likely to stay up given both the less than satisfactory monsoon as well as rising commodity prices. The third round of quantitative easing in the US is likely to see the commodities market flush with liquidity.


The repo rate has remained at 8 per cent while the CRR has remained at 4.75 per cent for the last six months. Liquidity conditions are in the comfort zone of the RBI, as banks are borrowing lesser amounts at the repo window.

Consensus estimates among economists point to a cut in rates during the half-yearly review in October. That’s when the busy season would have begun and perhaps the RBI would be in a better position to assess the impact of the fiscal steps.

Published on September 16, 2012

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