The Reserve Bank of India (RBI) may cut its policy rate further by 0.25 per cent this week to boost growth, as inflation remains under control and fiscal situation appears better following a record Coal India Ltd. (CIL) disinvestment.
RBI, which last month announced a surprise rate cut of 25 basis points after maintaining a hawkish monetary stance for 20 months, is scheduled to undertake its sixth bi-monthly monetary policy review, 2014-15 on Tuesday, February 3.
According to bankers and economists, there is room for further rate cut by RBI as retail and wholesale inflation rates have remained benign.
The concerns on fiscal deficit front have also eased, especially after the government last week garnered a record amount of Rs 22,577 crore through disinvestment of 10 per cent stake in CIL.
While lowering the policy repo rate to 7.75 per cent from 8 per cent, RBI had also said on January 15 that further rate cuts would depend upon inflationary expectations and improvement in the fiscal situation.
While the retail inflation slipped to 5 per cent in December, the Wholesale Price Index (WPI) inflation remained near zero level (0.1 per cent).
The government’s fiscal situation is expected to improve further with more disinvestments. So far, the government has realised over Rs 24,000 crore with just two disinvestment share sales, including SAIL’s Rs 1,719 crore late last year. It targets to raise a total of Rs 43,425 crore from disinvestment in the current fiscal, ending next month.
Citing favourable macroeconomic conditions, the government and the industry have also been asking for further rate cuts to lower the cost of capital, while RBI Governor Raghuram Rajan had faced a lot of criticism till last month for maintaining a highly hawkish monetary stance.
Even after last month’s rate cut, many had said that RBI’s move was “too little and too late”, while many bankers and experts have forecasted overall lowering of rates by up to one percentage points in the coming months.
Oriental Bank of Commerce’s chief Animesh Chauhan said most macroeconomic indicators favour a rate cut and he hopes that the RBI Governor would consider a rate cut on February 3 by 25 basis points.
Last month, Rajan had said that the further easing of rates would depend on “data that confirm continuing disinflationary pressures”.
“Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure,” Rajan had said.
State-run IFCI’s Managing Director Malay Mukherjee said: “There is a widespread expectation of rate cut but RBI has all the data it will take decision in their wisdom.”
PSU banking behemoth SBI also said in a research report that RBI may go for a “token cut” in interest rates in its upcoming policy review.
SBI Chief Economist Saumya Kanti Ghosh said: “We continue to maintain that the first rate cut could happen any time after the Budget, though the probability of a token cut on February 3 may have increased. We are pencilling in a 75 basis point rate cut in 2015.”
Bank of Baroda’s Executive Director Rajan Dhawan said that if there is credible fiscal consolidation, the rates will start coming down.
“With inflation coming down, I believe all rates such as deposit, lending rates will come down to more credible levels soon. I cannot second guess RBI, as it is their prerogative, but I feel when you have stable, low inflation, the policy rates have to come down,” Dhawan said.
“I think the RBI is waiting and watching to see the impact of all the measures that they and the government has taken…it will definitely result into lower rates in the future,” he added.
“While a rate cut is on the table next week, our base case is for the RBI to ease next in March, after just having delivered a surprise cut,” said Pranjul Bhandhari, Chief India Economist, HSBC India.
Chief Economic Advisor Arvind Subramanian said last month in Davos that RBI may further cut rates as it has managed to rein in inflation.