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The Reserve Bank of India (RBI) is likely to lower its policy repo rate soon if the factors leading to low inflation remain unchanged, deputy governor SS Mundra said on Wednesday.
"We are at a point of time where the economic environment is quite encouraging. Of course, it has been supported by global factors – oil prices are at an all-time low, commodity prices are low, and food prices have been softening from the past levels...If all these things continue to remain as they are, there will be room for softening of the policy rate," Mundra said during a seminar organised by the Confederation of Indian Industry (CII) in Kolkata.
On December 2, the central bank kept its policy repo rate unchanged for the fifth consecutive time as it remained wary of inflation. However, RBI had held out hope for industry, who have been demanding a rate cut to improve business confidence and revive investment cycle, by saying it could ease the policy rate early next year – even outside the policy review cycle – if the downward momentum in inflation continued and fiscal developments were encouraging.
RBI has now set a target of 8% retail inflation by January, 2015 and 6% a year from then. In October, retail inflation had hit a lifetime low of 5.52% (the series was launched in February, 2012), while wholesale price index (WPI)-based inflation slumped to a five year low of 1.77%.
Mundra, however, cautioned that there are still upside risks to inflation. "Some uncertainties will always remain. Inflation numbers today have an element of base effect, which will go away from next month. The global uncertainties can always return. Also, deficiency in monsoon can have some impact on food prices. We have to see how things are evolving (before deciding on rate cut)," he said.
