Conditions Ripe for RBI to Cut Repo Rate

Published: 15th January 2015 06:00 AM  |   Last Updated: 15th January 2015 06:00 AM   |  A+A-

MUMBAI: The slowing of inflation rates – both consumer price and wholesale price – to levels lower than those marked by the Reserve Bank of India for deciding on a possible repo rate cut, has raised some expectations of an earlier than expected lowering of the repo rate.

The government on Wednesday announced Wholesale Price Index at 0.11 per cent for December, compared with zero in November and 6.4 per cent in December 2013.

Repo Rate.JPGThe RBI, which plans to be data driven on its decision on inflation and repo rate cut, had set a target of 8 per cent CPI inflation for January 2015 and 6 per cent for January 2016. WPI has been steadily declining especially since May 2014, when it was 6.18 per cent.

“There are good enough reasons for a rate cut,’’ said Madan Sabnavis, chief economist at CARE Rating agency. “The RBI can take a call anytime now as global rates are benign, commodity prices are low, as are core CPI and headline inflation rates.’’

Analysts say even in case of a slight increase in prices, the CPI and WPI will still be below RBI’s target rate. While inflation has moderated, credit offtake and industrial production remain muted.

State Bank of India’s chief economic advisor Soumya Kanti Ghosh expects some cheer for manufacturing in November and December. A rate cut can help revive sentiment.

“The first cut could happen anytime after the Budget, though the probability of a token cut on February 3 may have increased,’’ said Ghosh. He expects 75 basis points cut in 2015.

Yet, some analysts remain skeptical about the government achieving its fiscal deficit target of 4.1 per cent, which may be a reason for the central bank to delay a rate cut beyond January into the next month.

Spending by the government for current fiscal has already touched the 99 per cent mark, though Finance Minister Arun Jaitley maintains the government’s commitment of ensuring fiscal deficit of 4.1 per cent of GDP. Any overshooting of spending makes it tougher for the central bank to lower rates.

The government has several options to ensure it meets 4.1 per cent target of fiscal deficit, points out Sabnavis. First, revenue inflow will be a net contribution, and then the government also has an option of reducing expenses, which it already has started to do at ministries and PSUs. Sabnavis expects RBI to start with 25 basis points cut and increase it to 100 basis points by December.

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