The Telegraph
Monday , January 28 , 2013
Since 1st March, 1999
CIMA Gallary

Guessing game on RBI rate cut

Mumbai, Jan. 27: The Reserve Bank of India (RBI) may spring a surprise by cutting the repo rate 50 basis points in its monetary policy review on Tuesday.

Economists and bond market players expect a cut of only 25 basis point in the repo rate, but lower inflation numbers and the urge to pump up growth may push RBI governor D. Subbarao to turn adventurous.

Advocates of a 25-basis-point cut are giving great weight to Subbarao’s recent statement about inflation being above the central bank’s comfort zone of around five per cent.

In its midquarter review of monetary policy in December, the RBI left the repo rate unchanged at 8 per cent.

The repo is the rate at which the central bank provides funds to commercial banks.

Those who feel that Subbarao may bring down the repo rate by half-a-percentage point have strong reasons to think so.

The RBI slashed the policy rate in April last year by 50 basis points on the back of a deceleration in economic growth and the softening of core inflation (non-food manufactured products). Experts find similarities in the macro-economic situation and hence expect a larger than anticipated reduction.

The second quarter GDP growth fell to 5.3 per cent against 6.7 per cent in the previous year, while industrial output has also been lacklustre.

Meanwhile, core inflation — a number that the RBI tracks closely — has been declining. Wholesale price inflation hit a three-year low of 7.18 per cent in December.

The government has also taken a few measures to improve the country’s fiscal status, a requirement that has been asked by the RBI often in the past.

“In the April (2012) policy, the RBI had gone by core inflation and this has come down further to 4.24 per cent in December. Core inflation could come down further and this shows that companies have lost pricing power given the huge demand deficit. This is also the right time to cut the repo rate by 50 basis points as industrial growth in the current fiscal has been on the negative territory for five months,” says Rupa Rege Nitsure, chief economist at the Bank of Baroda.

A senior official of a foreign bank said the RBI could take a 50-basis-point plunge now and signal caution on the rate trajectory ahead as pressures on inflation remained high.

However, most observers expect the apex bank to be cautious with inflation and bring down the repo rate by only 25 basis points. Some believe the RBI will reduce the policy rate by around 75 basis points through the rest of the year.

Kapil Gupta, economist at Edelweiss Securities, who expects a cut of at least 25 basis points, said inflation remained on a downward trend on weak demand, providing a strong case for reduction in policy rates.