Amid a rising clamour for a rate cut, the Reserve Bank of India (RBI) has cautioned markets against an ‘early celebration’ over a falling inflation and said there are still inflationary pressures in the economy.
“There are structural issues regarding protein inflation and base effects, and rural areas are also seeing inflation,” RBI deputy governor HR Khan said on Friday. He said the battle against inflation has a long way to go as input costs and wages remain elevated. Equity and bond markets are already pricing in an early rate cut, with the benchmark Sensex hitting an all-time high of 28,010.4 and bond yields touching a 15-month low of 8.19%.
Earlier this week, at an economic summit, Indian corporates called for a rate cut and finance minister Arun Jaitley also backed such a move, citing the recent fall in retail inflation.
Retail inflation eased to 6.46% in September, led by a drop in food and fuel prices. The RBI has said that it aims to bring down inflation to 8% by January 2015 and to 6% by January 2016. The RBI will release its bi-monthly policy on December 2.
Inflation is likely to ease further due to the drop in global crude oil prices besides easing domestic food prices. However, Khan downplayed the recent sharp fall in commodity prices and said that although this is a boon for India, there are geopolitical risks lurking. “But one cannot be sure…people say this is the bottom, but I don’t know. There are risks like a collapse in (oil-producing) countries like Libya, geopolitical tensions or (drop in) US production,” he said.
Brent crude has fallen nearly $20 per barrel over the last two months. The soft oil prices, along with a stable currency, augurs well for domestic inflation as well as the current account deficit position.
Khan said while an improvement in sentiment is good for the economy, a pick-up in growth is yet to show in hard data. “Growth sentiments are good, the savings investment equilibrium is improving. But capex cycle is yet to pick up, investments are yet to pick up, and exports are showing an up and down trend because of global growth,” he said.
RBI to impound Rs 10,000 cr from banks via cash management bills
After a gap of a year, RBI will impound Rs 10,000 crore from the banking system through cash management bills. RBI in a notice on Friday said it would auction 42-day cash management bills on Monday. The move comes at a time when the banking sector has moved to a neutral liquidity position from a deficit.
Borrowings from the daily repo window have fallen and rates on money market instruments like certificates of deposit and commercial papers have eased around 20 basis points.