Early festive season cheer may be round the corner, with expectations high that your home and car loan EMIs will come down soon. Check this: CPI inflation – the biggest pain point for the RBI-led Monetary Policy has hit a 5-year low of 1.54% in June. This is well below the 2-6% inflation range target that Monetary Policy Committee (MPC) has for the long-term. On the other hand, the Index of Industrial Production (IIP) grew at just 1.7% in May, the slowest since July 2015.
A repo rate cut by the RBI would allow banks to lend at lower rates, giving an impetus to demand, and also resulting in a reduction of your loan EMIs. While in the past transmission of rate cut benefit to consumers has been sluggish, the central bank has been working closely with banks to ensure that the bottlenecks in the system are resolved effectively. Economic experts are of the view that the central bank, and the MPC have all the reasons to gift the economy with a rate cut ahead of the festive season, and spur demand.
BofA Merrill Lynch Global Research is confident of its call that the RBI MPC will cut rates by 25 bps on August 2 “after June inflation, at 1.5%, expectedly slipped below the RBI’s 2-6% inflation target”. BofA sees three “compelling reasons” for the central bank to cut repo rate. “Inflationary pressures remain muted. Core CPI inflation also slipped to a low 3.7%. Second, we do not see the output gap closing any time soon with high rates constraining old GDP series growth, at a sub-potential 5.5-6%. Industrial growth, at a tepid 1.7% in May, reinforces our case of high lending rates resulting in anemic recovery. Finally, the monsoons are advancing reasonably well at 99% of normal. Autumn kharif sowing is 8.9% higher than last year,” says BofA’s latest research report. “On balance, we expect the RBI cut to signal a 25bp lending rate cut before the busy industrial season sets in October. Delays in RBI rate cuts would endanger the much-needed bank lending rate cut before the busy industrial season sets in October,” cautions the bank.
Watch now! Retail inflation hits historic low – what Arvind Subramanian has to say
Anubhuti Sahay, Head, South Asia Economic Research (India) at Standard Chartered believes that it’s the right time for the central bank and MPC to act. “We see the RBI cutting rates by 25 basis points in its August policy review. CPI inflation data has come in much lower than the range that RBI targets and going forward too, conditions are expected to remain benign, with inflation expected to range around 4%, making a perfect case for the central bank to lower repo rate. The impact of GST on inflation is likely to be neutral and external factors are no longer as worrisome,” she tells FE Online. “We see no reason why RBI should adopt a wait and watch mode anymore. Additionally, growth has not picked up and no factors as such are spurring it either,” she says.
DK Srivastava, Chief Policy Advisor, EY India is positive that a rate cut will happen in either of the next two policy reviews. “RBI will definitely cut repo rate in the coming policy reviews. If not August, then in October for sure. CPI inflation has come in at a level that is below RBI’s range. Food prices have fallen helped by supply-side measures. Inflationary pressures on global crude oil prices are also expected to remain muted, making a good case for rates to be reduced,” Srivastava tells FE Online. “The only factor that I think may make RBI wary to cut rates is the possibility of the US Federal Reserve hiking rates. But even so, a rate cut is expected in the coming months,” he adds.
A stitch in time saves nine – goes the age old saying. The Indian economy awaits a much needed booster shot to propel economic growth – and RBI has no reason to dither on a rate cut this time around. In fact, with a good monsoon, and favourable global economic conditions – RBI would find it hard to justify why it shouldn’t cut the repo rate.
Arvind Subramanian, the government’s chief economic adviser sees a paradigm shift in the inflationary pressures – something that he believes policy makers have missed. “The number (inflation) of 1.54 percent is historically low and reflects the firm and ongoing consolidation of macro-economic stability. The last time we saw such inflation – according to a slightly different CPI series (IW) — was in 1999 and before that in 1978. This low, heartening number is consistent with our analysis for some time now – and which will be fully elaborated in the forthcoming Survey — of a paradigm shift in the inflationary process to low levels of inflation – a shift that I think has been missed by all reflected in the large, one-sided, and systematic inflation forecast errors that have been made,” he said in a statement after the inflation data was released on Wednesday. “Clearly, this low number and what it implies about underlying price pressures – as well as the latest IIP data just released — is something that, I am sure, all policy makers will reflect upon very carefully,” he said.
Modi government has been wondering why the RBI and MPC have not cut key rates to drive economic growth. And with a monetary policy review scheduled for August – the government would have every reason to expect a rate cut – and so would you! Are the RBI and MPC listening?