FE Editorial : Here come the rate cuts
The Financial Express: Jan 16 2013, 00:27 IST
Though consumer inflation getting back to double digits probably puts paid to hopes of a 50 bps rate cut on January 29, almost any indicator a central bank should look at is at a multi-year low. At 7.18%, WPI inflation in December is at a three-year low, the last time such an inflation was seen was in December 2009 when inflation was 7.15%; inflation in manufactured products fell to 5.04%, a level last seen in November 2010. Strip away food products within manufacturing and you get to RBIís definition of core inflation, and this was down to 4.2%, a level thatís not too far away from the RBIís desired level of 4%. Indeed, were it not for the consistent surge in foodgrain pricesóat 18.7% in December, inflation in foodgrains is higher than it has been for several years. Indeed, if inflation continues to slow as projected, analysts are looking at a 75-100 bps rate cut by the end of the calendar year. A rate cut in itself will do little to spur capital investments as these have been held up for different reasonsóapart from issues like land and environment clearances, the fact is that large segments of India Inc are in no position to raise even the necessary equity to go ahead with projects. But what a rate cut will do is to give immediate relief to corporate balance sheets, especially for SMEs. In the case of rate-sensitive sectors, such as automobiles, a pick up in credit, and hence demand,
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