Mumbai, Sept. 16: The government’s bold steps towards fiscal consolidation are unlikely to enthuse the Reserve Bank of India to cut interest rates in its mid-quarter monetary policy review on Monday.
Inflation, which jumped to 7.55 per cent in August from 6.87 per cent in July, and the quantitative easing measures by the US Federal Reserve may compel the RBI to maintain status quo on rates, but analysts point out that the steps taken by the Centre have given the apex bank elbow room to bring down rates later this year.
On Thursday, the government hiked diesel prices and limited the consumption of subsidised LPG cylinders. This was followed by a green signal to FDI in aviation and multi-brand retail.
These measures sparked hopes of the RBI cutting the repo rate, which is the rate at which it provides liquidity to banks. At present, the repo stands at 8 per cent.
The grounds of optimism were on account of the apex bank’s previous utterances on rate cuts depending on fiscal consolidation.
“The economy is passing through a rough patch as is evident from industrial output, which grew a paltry 0.1 per cent in July. There is therefore a case for a rate cut of at least 25 basis points as it can stimulate investment,” a senior official of a private bank said.
Experts, however, believe that the RBI will not act in haste. They expect the apex bank to wait for these reform measures to run its course and take a call on rates.
“While the hike (in diesel prices) is a welcome step, given the sensitivities around the subject and opposition from political parties, the RBI will perhaps wait till a final decision is taken,” said Shubhada Rao, chief economist at Yes Bank, indicating that the RBI will be watchful of any rollback in the diesel price hike.
According to bankers, even if the government goes ahead with the price hike and the cap on cylinders, the RBI will prefer to see its impact on headline inflation.
The impact of both the measures is expected to be fully felt in October. Economists see the direct impact of the price hike on inflation at 60 per cent.
Subbarao had stated in the annual monetary policy in April that while revisions in administered prices might impact headline inflation, the appropriate monetary policy response to this would be based on whether the higher prices translated into generalised inflationary pressures.
While the rise in inflation in August was fuelled by higher prices of food items and manufactured products, economists fear further pressure on prices because of the third round of quantitative easing (QE3) by the US Federal Reserve. It is expected to result in higher prices of commodities such as crude oil, which is likely to stoke inflation.
“The RBI is unlikely to cut the cash reserve ratio or interest rates on Monday as the inflationary pressures persist and inflationary expectations are riding high on weak agricultural output, likely impact of fuel price rationalisation and QE3. The RBI may not cut rates till end-December,” Rupa Rege Nitsure, chief economist of Bank of Baroda, said.
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