Time fast running out for a rate cut

All conditions set by RBI for a rate cut have been met, say economists

Uncertainties continue to persist for the world's financial markets, with the US Federal Reserve holding on to ground zero on interest rates. Even as economic conditions across the globe remain fragile, economists in India believe the Reserve Bank of India (RBI) is likely to cut interest rates by 25 basis points.

For starters, food inflation is not throwing up any nasty surprises. Second, the transmission of policy rates has happened. Third, even though rains have been below long-period average, nearly 64 per cent of the country has received normal to excess rains. So the key conditions set by RBI for a possible rate cut have been met, say economists. Banks have largely passed on the 75 basis point rate cut effected by RBI in the past few months.

Given the Fed's concerns on fragile global conditions, the belief is growth in India will come under further pressure if any kind of stimulus to growth is not given. The broad understanding is that demand is sensitive to credit and for it to pick up, interest rates have to come down from current levels. Soumya Kanti Ghosh, chief economic adviser, State Bank of India, believes: "It is better to act now instead of waiting for a situation that will compel us to act. A good policy in good times leads to better results compared to a good policy in bad times."

Also, continued correction in commodity prices has kept the wholesale price index in the negative zone. The consumer price index, too, has shown no sign of escalating. With global growth not recovering in times to come, deflationary conditions could continue to worsen, which would further impact the pricing power of companies.

Finally, the Federal Reserve delay in increasing interest rates suggests a recovery will only be extended and not rapid. This gives RBI an opportune window to cut interest rates, as all its conditions for a rate cut have been met. Bank of America Merrill Lynch says: "Looking ahead, time is running out for further rate cuts, with the October to March busy industrial season only a month away, given that reserve money is running at a tight 9.5 per cent."