Will the Reserve Bank of India (RBI) reduce the repo rate this year? After US Fed chairman Jerome Powell somewhat disappointed Indian investors who were looking for three rate cuts this year by declaring there will be just one, the question that will become more important is, when will the Reserve Bank of India (RBI) decrease the repo rate?
Though a clear answer eludes everyone, experts pointed out that the Monetary Policy Committee was split in its opinion and that signalled that the voice for a rate cut is growing inside the MPC.
“Let the new government settle down and decide what it expects of the RBI. That’s going to set the basic contours of approaching the subject. I am personally in favour of a cautious approach. There is growth in the system. So why risk inflation, might be a way of looking at it,” said Prasunjit Mukherjee, CEO, Plexus Management Services, an investment advisory firm.
Another market expert found a degree of similarity between the stance of the Federal Reserve and the RBI. “This also lends credence to inflation sceptics. A bigger battle against inflation must be fought.”
Nilanjan Dey, director of Wishlist Capital and an veteran investment expert said, “RBI, which allegedly takes its cue from the Fed, will also remain reticent. Its recent statement did not indicate any adjustment in key policy rates. No change in repo, that is.”
“The MPC kept its policy rate and stance unchanged in a 4:2 vote. The statement showed that a majority of the MPC remains hawkish on inflation, while an increase in its growth forecasts suggests no urgency to cut rates. We now think the RBI will cut rates only twice in this cycle and note the risk that easing may be delayed,” Regional Economist at Barclays, Shreya Sodhani, told the media.
European Central Bank cut rates
However, earlier this month, the European Central Bank (ECB) had trimmed interest rates. It trimmed the benchmark rate to 3.75% from a record high of 4%. The decision was announced by ECB president Christine Lagarde on June 6 when she remarked that inflation has eased enough for them to start lowering rates.
“However, one must keep in mind that consumption is falling in Europe and that’s one of the reasons that prompted a rate cut. The two biggest economies of that continent Germany and France are in a negative consumption growth cycle,” added Mukherjee, pointing out that the US is in a different economic landscape with enough consumption and jobs.
Rate cut votaries growing
This time Ashima Goyal and Jayanth R Varma thought that the repo rate should be brought down by 25 basis points. While Varma is a professor at IIM-Ahmedabad, Goyal is professor emeritus at the Indira Gandhi Institute of Development Research.
Varma had urged for a rate cut by 2.5 percentage points in both the meetings in February this year and December last year. In the June meeting, Goyal also sought a reduction in the rate by a similar extent.
The MPC meets once every two months to review the economic situation and take a call on the prevailing key interest rates.
Growth and inflation
Balancing growth and inflation – like most other central banks of the world, that’s the motto of the RBI. And if the headline retail figure is anything to go by, then RBI is on course to achieve both.
The RBI is apprehensive of inflation rearing its ugly head once again. Helped by a slide in fuel prices, retail inflation stood at 4.75%, the lowest level in 12 months.
However, food inflation remains an area of concern. It did ease marginally to 8.62% in May from 8.75% in a month ago but remained too high for comfort.
Inflation for vegetable, cereals and pulses, on which a large section of Indians depend for their daily diet, the inflation remains uncomfortably high. Vegetables recorded inflation rates of 27.3% in May (27.8% in April), cereals recorded 8.69% and pulses recorded 17.14%.
A rate cut is likely to be cheered by the industry both for making funds cheaper and triggering consumption. It will also certainly be cheered by individual loan applicants who could expect it to trigger a reduction in housing, auto, personal and education loans. Even those with running loans could expect EMIs to be revised downwards.
Tool to control inflation
The rate of interest at which the RBI lends money to commercial banks is called the repo rate (an abbreviation of repurchase agreement). It is one of the tools with which the central bank tries to control inflation by increasing or decreasing money supply to the system.
RBI has not altered the rate which stands at 6.5% for 16 months now.
Both the US Federal Reserve and Reserve Bank of India remained focussed on controlling inflation and did not cut rates. With inflation progressively down to a 12-month low, the moot question is, when will RBI use its pair of scissors. Economy Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
