<div><em>RBI Governor is unlikely to expose the country to avoidable risks, says <strong>Sumit Sharma</strong></em><br><br>With the Reserve Bank of India (RBI) declaring Consumer Price Inflation (CPI) as its primary target there was good news for those looking for a repo rate cut. The CPI decelerated to 3.78 percent in July, compared with 5.4 percent in the previous month. The increasing divergence of CPI rate from RBI’s target rate of 6 per cent for January 2016 added to the industry’s joy.</div><div> </div><div>Another seemingly good news was an improvement in the Index of Industrial Production (IIP) numbers for June. IIP improved to 3.8 percent compared with 2.5 percent in May and 3.36 percent in April. Since January, the highest that IIP rose was 4.8 percent in February and has remained below 4 percent in the other five months. Yet, what the IIP doesn’t show is that capital goods fell 3.6 percent, and rose on the back of consumer goods and manufacturing. Consumer goods too rose on the back of a lower base.</div><div> </div><div>The two numbers guide one to agree that its time the central bank gave a hard look at reducing its repo rate to help industry lower its borrowing costs, and probably cut selling prices, lift demand and hopefully investments over a period of time.</div><div> </div><div>Adding to the sentiment, on Thursday (13 August) finance secretary Rajeev Mehrishi told a television channel that India’s interest rates are out of sync with the rest of the world, and could attract hot money since they are too high. Most of the advanced countries have rates at a negligible level. He said a rate cut would also help domestically as it would improve credit improve and exports. </div><div> </div><div>So, will RBI go with a rate cut much ahead of Sept 29 policy?</div><div> </div><div>Opinions are divided. While some economists feel the RBI should be less conservative and spring a surprise, some others would rather prefer to wait until mid-September. </div><div> </div><div>Two major events by then would help RBI to be on a firmer footing. The U.S Federal Reserve is likely to make its move by then on its own interest rates. Data so far suggests that U.S could be track to announce its first interest rate increase after the global financial crisis in its next Federal Open Market Committee (FOMC) meeting on Sept 16-17.</div><div> </div><div>Also, by then the extent of monsoon rains and areas that are likely to remain deficient would be evident. Even as better supply management can help rein in prices, authorities have regularly faltered on this count. The sudden and sharp spurt in onion prices is a case in point. Minister in-charge of ensuring such supplies said it could take four months for onion prices to return to moderate levels. Such statements surely don’t inspire confidence.</div><div> </div><div>Then, the surprise devaluation of the Yuan by People’s Bank of China (PBoC) is no mean factor and will continue to hang like Damocles’ sword in the coming months. A rate cut has implications on foreign inflows into local assets. Currency disturbances globally could hurt India too even though Governor Raghuram Rajan has boosted India’s foreign exchange reserves, and the current account deficit is under control. Yet, it’s anybody’s guess whether one would like to play safe or rather be sorry. </div><div> </div><div>So for the moment one could safely bet the RBI may wait for the tide and impending storms to settle rather than expose the country to avoidable risks.</div><div> </div>
