Mumbai, March 17: The Reserve Bank of India is widely expected to cut the repo rate by 25 basis points in its mid-quarter monetary policy review on Tuesday despite a high rate of inflation.
Economists and bond market circles feel RBI governor Duvvuri Subbarao will bring down the repo rate to 7.50 per cent for three reasons. The economy continues to be in the middle of a slowdown, necessitating a growth push. Besides, core inflation, or non-food manufactured product inflation, is at a three-year low. Moreover, the government’s attempt at fiscal consolidation is expected to offer some headroom for lower interest rates.
Recently, Subbarao gave an indication to this effect when he said though higher consumer price inflation (CPI) was a cause for concern, the government’s commitment towards fiscal consolidation should provide the apex bank the window to address growth risks.
“A rate cut on March 19 would show that the RBI was ready to work with the government to boost growth if fiscal policies fell into place, as previously promised by the governor,” Anubhuti Sahay, economist at Standard Chartered Bank, said.
Sahay and Nagaraj Kulkarni, also of Standard Chartered, added that adherence to the fiscal deficit target in 2012-13, the fall in GDP growth to decade-low levels and a decline in core inflation to below 4 per cent for the first time since April 2010 would encourage the RBI to reduce the repo rate.
The repo rate is that at which the Reserve Bank provides liquidity to banks.
Wholesale price inflation (WPI) for February stood at 6.84 per cent, which is higher than analysts’ forecasts. Inflation as measured by consumer prices, too, is in double digits.
Analysts maintain that Subbarao will draw comfort from the fall in core inflation that reflects weak pricing power of companies.
They add that WPI for February was higher mainly because of costlier fuel.
The RBI has pointed out in the past that though higher fuel prices may lead to a spurt in inflation, it has its benefits as well. “Given that this spurt in fuel inflation is a necessary adjustment to keep demand side pressures at bay and is the result of suppressed inflation coming out in the open, the governor may want to discount the spurt in the headline WPI inflation and instead focus on the collapse in core inflationary pressures,” Abheek Barua, chief economist of HDFC Bank, said in a note.
Some expect the RBI to give a more guarded forecast by reiterating that it will track inflation data and the Centre’s fiscal consolidation measures before taking any step.
Many aver that the RBI will bring down repo rate by an additional 50 basis points (after the 25-basis-point-cut on March 19) this calendar year.
Though liquidity continues to be tight, many feel that the cash reserve ratio (CRR) is unlikely to be reduced. It is feared that retail borrowers may not see any reduction in lending rates in the absence of a CRR cut.
Investment bank Morgan Stanley recently said in a report that high CPI would deter the central bank from bringing down the policy rate on Tuesday.
While a quarter of a percentage point reduction in the policy rate has largely been discounted by the market circles, brokers said the focus would be on the guidance given by the RBI as well.