MUMBAI: The Reserve Bank of India will on Tuesday find it less onerous to lower repo rate by 25 basis points in its monetary policy review as most key parameters such as inflation, industrial growth and credit off-take conforming to its desired trajectory.
Helping the central bank decide is a steady deceleration in inflation. The Consumer Price Index of inflation (CPI) slowed to a four-month low of 4.87 per cent year-on-year in April from 5.25 per cent in March, aiding the data-driven Reserve Bank which aims to tame CPI to 6 per cent or less by January 2016.
Also supporting a cut is the subdued growth in Index of Industrial Production (IIP), which in March grew by 2.1 per cent the slowest in five months, and has been subdued for more than a year. Last week’s Gross Domestic Product (GDP) growth of 7.5 per cent in January-March quarter is yet to be tested by ground reality.
“The Reserve Bank of I ndia could go for 25 bps rate cut and not 50 bps as food inflation could emerge as a problem since outlook for the monsoon is uncertain,’’ said Ritesh K Singh, corporate economist at Raymond Limited.
“A rate cut could also mean slowdown in overseas investment in local debt but that’s not much of a concern since the country has sufficient reserves.’’
Another factor holding back the central bank from aggressive rate cut now besides the monsoon is the beginning of interest rate up-cycle by the US Federal Reserve.
Rise in US rates will attract funds out of emerging economies such as India, so RBI is unlikely to narrow the rate difference further with the US and has much wider implications.
Slow credit offtake by companies as well as individuals is another factor in favour of a rate cut.
Growth in bank credit in the year to March 2015 was the slowest in more than a decade.
Muted demand for bank credit has also been a key reason for banks not lowering their base rates significantly despite the Reserve Bank having cut its repo rate by 50 basis points since January. Sustained lowering of repo rates are seen as a way out of the vicious cycle of low credit demand, non-performing assets (NPAs) and profitability.
Going by Rajan’s suggestion that central bank will try to maintain between 1.5 and 2 per cent inflation-adjusted interest rate, one could see it cut repo from 7.5 per cent at present.
Yet, Arun Singh, a senior economist at Dun & Bradstreet India, recommends RBI hold its rate because of persisting food inflation, uncertain monsoon and the US Fed rate hike among reasons outweighing the factors that may support a rate cut.