With the US Fed’s decision to maintain status quo in monetary policy creating the buzz that the Reserve Bank of India would indeed cut rates later this month, economic affairs secretary Shaktikanta Das on Friday said the Fed’s move was positive for India, adding that RBI will take a considered view on whether to lower interest rates or not.
“The RBI will take a considered view as far as monetary policy and interest rates are concerned,” Das said, when asked if the Fed’s stance hasn’t provided more headroom for the central bank to cut rates.
The Fed extended its on-hold stance in its policy review on Thursday, keeping interest rates near zero for nearly a decade,
as it wanted to be certain about employment revival. Global growth concerns also weighed on the decision.
“The decision of the Fed gives more room to emerging markets to adjust their policies. In India, we were in any case prepared for all eventualities and the government would continue to take various reform measures which have been taken in the last one year. Policy action will continue to further stabilise our economy,” Das said.
Analysts said the receding external risks have paved the way for the RBI to cut the repo rate by 25 basis points when it reviews monetary policy on September 29. “Based on domestic developments, there is a sufficient case for rates to be lowered,” said Radhika Rao, an economist with Singapore-based DBS Bank.
India’s CPI inflation was 3.78% in July and 3.66% in August thanks to broad disinflation in addition to base effects. The RBI is targeting retail inflation below 6% by January next year while many analysts expect it to remain in the 5-5.5% range.
On Thursday, RBI deputy governor Urjit Patel had said sustained low inflation in the medium to long term and credible fiscal rectitude by the government were key prerequisites to lower the cost of funds. Many saw this as an attempt to temper expectations of aggressive rate cuts by the RBI.
Commenting further on the Fed decision, Das said it was a positive sign for India because if the US economy revives, it was good for Indian software exporters. US is a key market for India’s software and merchandise exports. Analysts were of the view that an interest rate hike by the Fed would have resulted in flight of capital from emerging market economies, including India.
“It’s (decision not to raise rate) also a good sign because the US has taken note of the global concern that these are volatile times and there should be coordinated action with regard to monetary policy,” he said.
Indian policymakers were expecting a modest rate hike by the Fed and were prepared to deal with any adverse impact thereby.
Despite some challenges like rise in bad loans in the banking sector, India’s sound macroeconomic indicators such as economic growth, inflation, fiscal deficit and current account deficit, have put it in the category of countries which are resilient despite short-term transitory impacts of global turmoil. India’s economy is expected to grow over 7.5% in the current fiscal year, he added.