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RBI policy tomorrow: Key interest rate expected to be cut by 25 bp

Citing inflation at 5-year low, deceleration in factory output, Assocham requested for rate cut

IANS  |  Mumbai 

Reserve Bank of India

With the latest macro-economic data showing at a record low and fall in factory output, the Reserve of (RBI) is expected to reduce its repo, or short term lending rate, at its monetary policy review on Wednesday.

At its second bi-monthly monetary policy review of the fiscal on June 7, the RBI maintained status quo on its short-term rate for lending to commercial banks, at 6.25 per cent. In doing so, the policy statement said the six-member Monetary Policy Committee (MPC) was guided by the risks to

Retail in during June dropped to a record low of 1.54 per cent, while industrial production data showed that the growth in factory production fell to 1.7 per cent in May, from 8 per cent in the same month a year ago.

Industry chamber Assocham on Sunday urged the apex to cut interest rates in view of the latest macro data.

"Citing at a five-year low and deceleration in the factory output, the Assocham has written to RBI Governor Urjit Patel, making out a strong case for at least 25 basis point cut in the policy when the RBI Monetary Policy Committee meets on August 2," an Associated Chambers of Commerce and Industry of statement said here.

"The wholesale price index (WPI) also eased to 0.9 per cent from 2.17 per cent. The case for rate-cut is additionally strengthened by easing of food to (minus)2.12 per cent from 0.31 per cent.

Good monsoon forecasts for the current financial year have additionally created a stance for further reduction in the food inflation," Assocham said.

With in falling dramatically, British financial services major HSBC said cut in key policy rates is likely as the country's differential with the world is normalising, expectation is cooling and food prices are also falling.

"All considered, we continue to expect a 25 bps (basis points) rate cut in the August 2 meeting. We expect the central to maintain its neutral stance, which we believe is consistent with moderate rate cuts," HSBC said in a research note.

"We've said this before, and we have found new evidence since may have already become a 4 per cent economy," it said.

June was the fourth policy review in succession that the MPC had kept the repo rate unchanged.

Announcing status quo on the key interest rate, Patel said the abrupt fall in in April "from the firming trajectory that was developing in February and March has raised several issues that have to be factored into the projections.

"Considering the high uncertainty clouding the near-term outlook, there is a need to avoid premature policy action at this stage. Premature action at this stage risks disruptive policy reversals later and the loss of credibility." he said.

The MPC has the mandate of achieving the medium-term target for consumer price index (CPI) of 4 per cent within a band of 2 per cent either way.

Since the MPC started setting rates in October last year, the June policy review was the first time it did not take a unanimous decision, with five members voting in favour of holding the rate and one opposing.

The sole dissenting external member and IIM-Ahmedabad faculty Ravindra Dholakia voted for a minimum 50 bps cut in the repo rate.

Three of the six members of the MPC are government nominees, while the others are from the RBI.

Following the June monetary policy decision, Chief Economic Advisor Arvind Subramanian felt the central had overstated the risks on inflation, noting the outlook has been benign, while growth in the economy has decelerated along with slowdown in private investment, credit growth and gross capital formation.

"Seldom have economic conditions and outlook pointed so strongly towards monetary policy easing," he told reporters then.

A State of (SBI) report said that most risks are now on the downside and retail is expected to be below 3 per cent for August-September, under 4 per cent for October-November, and between 4-4.5 per cent for December to March next year.

According to an American expert, Indian policymakers would do well to target keeping annual retail in the country in the range of 4-5 per cent without aiming to lower this rate significantly.

"Many people in the advanced economies are saying we should have been at 4 per cent (rate), and not be at 2 per cent, which was a mistake. There is a debate on," Professor of Economics at Harvard University Kenneth Rogoff told a channel here, referring to the prolonged phase of low coupled with low growth being experienced by Western economies.

"I think that if a lot of countries were starting from scratch, I bet they would opt for a 3 per cent target," he said, adding that there were a "number of reasons for India, not to bring it (inflation) down too quickly."

First Published: Tue, August 01 2017. 10:46 IST