Limited room for rate cut if inflation target is to be achieved: SBI report

The State Bank of India (SBI) in its report authored by Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser stated that if the Reserve Bank of India (RBI) moves towards the four percent inflation target in January 2018 as was suggested earlier, there would be limited room for rate cut in their forthcoming monetary policy.

In a report titled 'RBI caught in a bind: Expect status quo on October 4, 2017', Ghosh opined that on the eve of the forthcoming monetary and credit policy, the central bank is 'stuck in a conundrum of low growth, mild inflation, saving financialization and external uncertainties'. This would make the job difficult for RBI on October 4, he said.

"In February 2015, the RBI and the Government of India (GOI) had signed the monetary policy framework that envisaged that "the inflation target for FY17 all subsequent years shall be four percent with a band of +/-2 percent". Since September 2013, the RBI in conjunction with GOI has adroitly managed inflation in the decided band. The demon of inflation that was hanging like a Damocles' sword has been effectively controlled," the report stated.

"Against this background of flexible inflation targeting, the obvious question that arises is choosing between the move towards achieving the four percent inflation target swiftly or staying in the inflation band," it added.

Ghosh further noted that an uncertain global environment and weak growth has been witnessed, in particular, a 'wobbly' external environment compared to what it was at the beginning of 2017.

With regards to external debt, total external debt stocks of developing countries including India and economies in transition are estimated to have reached USD7.1 trillion in 2016, noting an overall increase of 80 percent since 2009. This, Ghosh believes, is attributable to be the reason why the Indian rupee is currently witnessing depreciation pressures.