A broad consensus is RBI Governor Raghuram Rajan will hold interest rates steady. After cutting 150 basis points cumulatively over his tenure, the expectations of further rate cut is done and over with. Besides, RBI’s main interest rate influencing yardstick, inflation, has been persistently sticky.
June’s CPI rose to 5.8 per cent, a tad higher than the May 16 reading. Food inflation continued to contribute to consumer inflation as it increased to 7.8 per cent in June seeing its lowest levels in a year in March 16 at 5.2 per cent. Food inflation is persistent in vegetables and sugar, however, inflation in pulses has moderated due to a higher base.
Hence, the reasoning goes, Rajan may not oblige. But Rajan is not yet.
First, core inflation has slowed down to 4.6 percent over last as compared to 4.7 percent in the previous month due to easing services inflation.
Second, the monsoons have been above-average, which will lead to higher agricultural output and lower food inflation.
Third, the government has released its inflation target which is in-line with the RBI’s at 4% in 2016-17 and beyond.
It may be recalled, the government had signed a Monetary Policy Framework agreement with the Reserve Bank of India in February 2015, which targets an inflation rate of six percent by January 2016 and 4 per cent for the financial year 2016-17 and subsequent years, with a variation of +/- 2%. This is now in sync with the government’s targets.
Fourth, the government is committed to fiscal reforms while having a target of 3.5 percent on the fiscal front, which will help in keeping the macro-economic stability, while also aiding in consolidating and strengthening the rupee.
Fifth, some of the key components of inflation in India such as oil prices have eased in the past few weeks dipping to levels of $43, with chances it will remain sluggish in the coming months. For India, oil at a level of $50 per barrel is a sweet goldilocks spot.
In April 2016, the RBI Governor sounded dovish saying that the interest rates are significantly lower, and will continue to remain so.
Cumulatively, the RBI has cut rates by 150 basis points, but the transmission of the same in the economy has been slow.
But given that the macro-economic conditions has been stable with continued dollar inflows into India’s coffers, there is a case for a further 25 basis points rate cut in this monetary policy.
The RBI Governor has been instrumental in setting up a Monetary Policy Committee which will decide on interest rates in the future. Inflation targeting by the government is spot on. Hence, don’t be surprised if Rajan springs a surprise with a rate cut.
BW Reporters
Having addressed business, stock markets and personal finance for the last 18 years, Clifford Alvares has ridden the roller-coaster markets - up close and personal -successfully, traversing the downs and relishing the rises. The greater part of his journalistic ventures has gone into shaping articles about how to shape portfolios