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Top 7 Reasons Why RBI Must Cut Rates Tomorrow

BW Online Bureau Aug 03, 2015

Will Reserve Bank of India (RBI) governor Raghuram Rajan spring a surprise by cutting the repo rate 25 basis points in its monetary policy review on Tuesday (04 August)? The last rate cut was announced on 02 June after two back-to-back inter-meeting rate cuts in January and March. A large section of economists maintain that the central bank may leave the repo rate unchanged at 7.25 per cent. However, a few expect a surprise from Rajan in the form of a 25-basis-point cut in the policy rate. A lower repo rate will bring down banks’ borrowing costs, which in turn, may prompt them to slash their “base rates”, the floor interest rate on which lending rates for final home, auto and corporate borrowers are fixed. It can lead to lower floating home loan rates, which move in tandem with base rates, and bring cheer to consumers, who have been paying large chunks of their income as EMIs towards repaying housing loans. Here are top seven reasons on why it's time for another rate cut   1) Consumer price inflation (CPI) accelerated to an eight-month high of 5.4 per cent in June. But going ahead, the base effects will come in play, and at least till August, retail inflation will remain low, below 5%, creating space for RBI to cut its policy rate. Incidentally, wholesale price inflation (WPI) has been in negative territory for seven months in a row. In June, it was at minus 2.4 per cent. Chief economic adviser Arvind Subramanian has said focusing on retail inflation may not be the right thing to do at a time price indicators are pointing in different directions. 2) The corporate sector asserts that tepid industrial production numbers and the continuous fall in wholesale prices merit a repo rate cut. The WPI is in the negative territory for seven months. Many believe that this shows the loss of pricing power in the manufacturing sector and the central bank should not only focus on the CPI. A lower rate will help prop up growth in Asia’s third largest economy—at least, that’s the popular belief. 3) Poor demand also took a toll on corporate profits in the second quarter. So, circumstantially speaking, there is a case for a rate cut. Corporate profits are hurting. An analysis of 70 companies with a market capitalisation of at least $100 million showed net income fell by 5 percent in April-June, the second consecutive quarterly decline, according to Thomson Reuters data. 4) So far, the monsoon rainfall in the country has turned out to be better than the forecast made by the India Meteorological Department (IMD) in early June. The monsoon’s revival from mid-July has boosted rice and soybean crops, curbing food price gains and easing concerns of shortages. Good rainfall this year is key to boosting a rural economy hit by delayed and lower rains last year, as well as keeping a lid on food inflation and giving India's central bank more scope to cut lending rates. 5) Another area where the RBI governor can take comfort is a decline in global crude oil prices. Currently, the Brent crude oil prices are trading $54 per barrel compared to $65 a barrel in early June. This will ease pressure on inflation as well. 6) In the current economic scenario, a repo rate (the rate at which banks borrow from the RBI) cut and government spending are likely to revive corporate investments in the infrastructure space and is likely to trigger credit pick-up. It is further expected to come as a booster for capital-intensive sectors that have been deferring investments due to high costs and low capacity utilisation. 7) Finally, the uncertainties surrounding the timing of the proposed rate hike by the US Federal Reserve (Fed) still loom large and, hence, RBI should pare its policy rate now as the Indian central bank may find it difficult to do so when the Fed bites the bullet. Many believe this could happen as early as September, writes Tamal Bandyopadhyay in the Mint.