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Softening Rates Ahead?

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[As hinted at its 16 December monetary policy review, stage seems to be set for RBI to finally reverse its fight against inflation by cutting rates. State-run Union Bank of India cut its base rate by 10 basis points to 10.65 per cent on Thursday, becoming the first Indian bank to do so this year, signalling interest rates may start softening in the economy. In the December 16 policy, RBI Governor D Subbarao had opted for a halt to the 13 consecutive rate hike cycle by keeping the rates unchanged. In its outlook for the rest of the financial year and beyond, RBI underscored the risks to growth; it also pointed out that sudden events could arrest the downward momentum of inflation. Things seemed to be helped along by the fact that food inflation fell to its lowest level in almost six years at 0.42 per cent for the week ended December 17, with a sharp decline in prices of essential items like onions and potatoes likely to prompt the RBI to cut interest rates at its policy review next month. With food inflation declining to below 1 per cent, the lowest since April, 2006, Finance Minister Pranab Mukherjee hoped that headline inflation would drop to 6 per cent by March-end. "If this trend continues, then you will have year-end (headline) inflation around 6 per cent (plus/minus)... But it can not be lower than 6 per cent, because inflationary pressure was higher in weeks before," he told reporters. Food items have a 14 per cent share in the overall Wholesale Price Index (WPI) basket. India's main policy rate is at its highest since July 2008 after the central bank raised rates 13 times since March 2010 to rein in high inflation. Experts attributed the fall to a good kharif harvest as well as a high base. "This is a base affect and the good kharif harvest has also contributed to moderation. We expect the prices to remain low for the next few weeks and this may help the RBI to go for rate cuts in the near future," Crisil Chief Economist D K Joshi said. While suggesting that food inflation may go into the negative zone by December-end, Joshi, however, cautioned that headline inflation is likely to remain high due to elevated levels of price rise in manufactured items. Manufactured inflation, which forms over 65 per cent of the WPI basket, is hovering around 8 per cent. Union Bank of India Takes A Stance "Credit growth is not very high and interest rates have peaked so we thought it is a good time (to pass on the benefit)," M.V. Nair, chairman and managing director of the bank, told Reuters. "We have to see the signal that Reserve Bank gives but rates coming down will be very gradual. It may stand steady one or two quarters," Nair told CNBC-TV18, when asked whether he expected a 50-60 basis points fall in lending rates by March. Pausing its interest rate tightening in its policy review on December 16, the central bank signalled a shift in its focus to growth from fighting inflation. "From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth," the RBI had said in a statement. Analysts were, however, skeptical other banks will take a cue from Union Bank's move. "I'll be surprised if other banks follow. Union Bank is too small to force others to move and 10 basis points is hardly anything," said Krishnan A.S.V, analyst with brokerage Ambit Capital. The bank's shares, valued at $1.6 billion, rose as much as 4.3 per cent after the announcement. The stock ended 2.8 per cent higher at in a Mumbai market that was down 1.17 per cent.