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Amid slowdown, government expects RBI to cut interest rate today

04 Octubre 2017, 04:31 | Azura Castelo

Will RBI cut its monetary policy rate despite inflation expectations being still considerably high in India

Will RBI cut its monetary policy rate despite inflation expectations being still considerably high in India

Its monetary policy committee voted to keep key interest rates unchanged at 6% earlier in the day, shrugging off the government's call for a cut to boost the sluggish economy. The reverse repo rate has also remained unchanged at 5.75% and bank rate at 6.25%. In its statement the central bank said that going forward inflation is expected to rise from its current level and range between 4.2-4.6 per cent in the second half of this year, including the house rent allowance by the Centre. The manufacturing PMI moved into expansion zone in August and September 2017 on the strength of new orders. We need out of the box thinking. Five members of the panel voted in favour of maintaining the key lending rate.

"The MPC (Monetary Policy Committee) made a decision to keep the policy stance neutral and monitor incoming data closely".

IDFC Bank said, "The lower growth numbers make the RBI task more complicated, as it is likely to be associated with higher inflation prints from now on".

Overall, RBI growth outlook has done well by signaling that despite concerns, there is nothing to panic on the economic growth front.

But the rupee rallied to as much as 64.9450 per dollar from its close of 65.49 as the RBI appeared to lower the chances of rate cuts by raising its inflation forecast to 4.2-4.6 percent in October-March, compared with its previous projection of 4.0-4.5 percent, still historially low for India. RBI left the rates untouched. However, data released on Tuesday said the core sector growth came at a 5- month high of 4.9 per cent for August, up from 2.9 per cent for July.

When banks have surplus funds but have no lending (or) investment options, they deposit such funds with RBI.

This time around, the monetary policy statement had to be about growth rather than inflation.

RBI while making a 25 basis points cut in repo rate to 6% during August 2017 policy, retained the projection of the real GVA growth for FY18 at 7.3% with risks evenly balanced.

Rising inflationary pressures weighed heavily on the MPC members' decision to keep rates on hold.

The Government has already implemented stringent policies like RERA which is increasing the confidence of buyers.

Ashwin Sheth - CMD, Sheth Corp.

However, the telltale signs of weakness in the macro-economic indicators tied the hands of the MPC to maintain status quo on policy rates, even though inflation seems to be pretty under control.

Manufacturing sector, which accounts for more than three-fourth of the entire index, continued to crawl at 0.1 percent growth in July, compared with (-) 0.4 percent in June and 5.3 percent in the same period past year. Nominal GVA slowed down to 7.9% - lower from 11.3% in last quarter. "Also, RBI may want to look at more data to cut rates".

A rise in input costs and lack of pricing power could put pressure on corporate margins.

"In our view, the scope for further rate cuts this year would be restricted to 25 bps, which would materialise only if the inflation trajectory significantly undershoots expectations", said Naresh Takkar, MD & Group CEO, ICRA Ltd.

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