1. Cooling inflation to fuel calls for lower interest rates

Cooling inflation to fuel calls for lower interest rates

Arvind Subramanian, Narendra Modi's chief economic adviser, early this month warned of looming deflation and called for measures to boost consumer demand and step up investment.

By: | New Delhi | Published: September 14, 2015 8:44 AM
Inflation

With price pressures at record lows, expectations are building that the Reserve Bank of India will lower borrowing costs by at least 25 basis points (bps) at its next policy review on September 29, after three cuts earlier this year. (Reuters)

Inflation probably cooled further in August, data on Monday is expected to show, adding pressure on its cautious central bank to cut interest rates again as soon as this month to spur economic growth.

With price pressures at record lows, expectations are building that the Reserve Bank of India will lower borrowing costs by at least 25 basis points (bps) at its next policy review on September 29, after three cuts earlier this year.

Calls for a rate cut have grown louder after annual economic growth slowed to 7 percent in the April-June quarter from 7.5 percent in the previous quarter. And some economists fear real growth is more sluggish than official figures suggest.

Arvind Panagariya, a top policy adviser to the government, said last week said the economy needed 50-100 bps of rate cuts. Similar calls were made by Indian business leaders at a meeting with Prime Minister Narendra Modi last Tuesday.

Annual consumer price inflation, which the central bank tracks to set rates, likely eased to 3.6 percent in August due to lower fuel prices, from a record low of 3.78 percent in July, according to analysts polled by Reuters.

Wholesale prices, another inflation gauge, are expected to have fallen for a 10th straight month, tumbling 4.40 percent on-year compared with a 4.05 percent fall in July.

Indeed, the rapid deceleration in prices has ignited a debate in New Delhi whether Asia’s third-largest economy is heading towards deflation.

Arvind Subramanian, Modi’s chief economic adviser, early this month warned of looming deflation and called for measures to boost consumer demand and step up investment.

RBI Governor Raghuram Rajan, however, is worried about a resurgence in price pressures in a country where inflation has been notoriously volatile.

While food inflation has remained in check despite below average summer monsoon rains, prices of some staples such as onions and lentils are racing up. Entrenched expectations of high inflation also are feeding into higher wages.

“Yes, there has been moderation in some prices, but that’s not signalling deflation,” said N. Bhanumurthy, senior economist at the NIPFP policy think-tank in New Delhi. “In fact, we are not anywhere near that.”

But for the RBI, as for many other central banks around the world facing sluggish growth, much will depend on whether the  US Federal Reserve raises interest rates this week for the first time since 2006.

Easing policy at the same time as the Fed is tightening, however modestly, could spur further capital outflows from emerging markets.

While some analysts believe the chances of a September hike have eased amid fears of a China-led global slowdown, any fresh burst of financial market volatility following the Fed’s decision on Sept. 17 could force the RBI to stand pat.

“If there is a (US) hike, then market reaction will need to be monitored,” said A Prasanna, an economist with  ICICI Securities Primary Dealership Ltd. “I still expect markets to calm down by the time of RBI policy date.”

The RBI has lowered rates by a total of 75 bps since January. However, it left the policy repo rate on hold at 7.25 percent at its last meeting, tying future cuts to the inflation outlook.

Wholesale price data will be released at 0630 GMT on Monday, with consumer prices at 1200 GMT.

  1. N
    Narendra M
    Sep 14, 2015 at 9:14 am
    (1) It is the Consumer Price Index or CPI which is to be considered while making demands for a rate cut by Reserve Bank of India (RBI). My fear is that failure of monsoon may actually lead to high inflation and create difficulties for those whose main source of income is interest on bank deposits. Benefits of recent fall in inflation rate may be negated later this year. (2) Is RBI governor being cornered by the Union Finance Minister and compelled to take a decision to cut its bank rate? (3) My query is this: who will gain after the bank rate cut and who will lose? (3) Commercial banks are waiting for an opportunity to cut interest on fixed deposits. I believe the first thing the banks will do after cut in RBI’s rate is to cut interest on fixed deposits by half a per cent or even more. (4) My point is that all non-pensioners, whose main source of income is interest on bank fixed deposits, National Saving schemes, etc. have to be protected from risk of capital erosion. Here I wish point out that those who get inflation indexed government pension do not face any major problem on account of reduction in interest on bank fixed deposits as their pension is linked to CPI. My question is this: Is the government not concerned about that section of our society which is vulnerable to interest rate risk. If it is concerned, what kind of social security it would provide to senior citizens and other sections of the society who do not receive any pension?
    Reply
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