RBI unlikely to cut rates in October policy: Economists

Inflation numbers, while still below RBI target of 4% are rising and this is an interesting point in RBI's inflation-targeting framework, say economists

Economists don’t expect the six-member monetary policy committee of the Reserve Bank of India (RBI) to tinker with rates in the October 3-4 policy review, according to a Business Standard poll.

Nine of the 10 economists polled said the central bank would not cut its policy rate before seeing what the results of the proposed fiscal push by the government would be, at a time when the inflation rate is showing signs of going up.

Rupa Rege Nitsure, group chief economist of L&T Finance, said there could be a 25-basis-point cut in the repo rate, while the growth numbers could be revised downward by 50 basis points. The tone of the policy, she said, would be dovish.

Gross domestic product dropped to a three-year low of 5.7 per cent in the April-June quarter, while the retail inflation rate in August shot up to 3.36 per cent from its July level of 2.36 per cent and a record low of 1.5 per cent in June.

The inflation numbers, while still below the RBI target of 4 per cent, are rising and this is an interesting point in the RBI’s inflation-targeting framework, say economists.

“We seem to have reached the bottom of the interest rate cycle and the upcoming policies will be testimony to the inflation-targeting framework. Since 2014, the framework has benefited from falling oil prices. On the contrary, in the current situation of the rising inflation rate and current account deficit (CAD) amid slowing growth, the glide path for the policy should be crafted properly,” said Soumyajit Niyogi, associate director at India Ratings and Research.

Standard Chartered Bank’s India economist Anubhuti Sahay said there could be scope for a 25-basis-point cut, but that would not come in October. 

The last inflation print was on the higher side, even as the current economic environment, including talks of a stimulus package and outflow of foreign funds at a time of the falling rupee and rising crude oil prices, doesn’t augur well for a rate cut. 

“With the repo rate at 6 per cent and the consumer price index inflation rate expected to average 3.7 per cent in FY18, lower than the medium-term target of 4 per cent, there may be room for further monetary easing. However, we do not expect an immediate rate cut, as headline inflation is expected to continue to rise, and print between 4.5 and 5 per cent in March 2018,” said Aditi Nayar, chief economist of ICRA Ltd.

Indranil Pal, chief economist of IDFC Bank, said with talks of a fiscal stimulus in the offing, chances of a rate cut in even December were bleak. 

“It is very difficult to evaluate the chances of a rate cut in the remaining part of the fiscal year,” said Pan. 

Economists, however, also say the inflation situation is unlikely to be scary. The food inflation rate should come down with improved supply, while the house rent allowance-related rate may not be very worrisome. Economists also say that it is highly unlikely that the economy would need coordinated push by both the government through fiscal accommodation and by the RBI through monetary easing.