Here’s why RBI won’t cut rates at monetary policy meet today

By: | Updated: October 4, 2017 9:54 AM

The Reserve Bank of India has many reasons, as experts say, to cut rates at its bi-monthly Monetary Policy Committee (MPC) meeting on Wednesday, but the central bank has one major reason to not cut rates.

NBFCs, RBIThe RBI will be announcing its bi-monthly monetary policy tomorrow. (Express Photo)

The Reserve Bank of India has many reasons, as experts say, to cut rates at its bi-monthly Monetary Policy Committee (MPC) meeting today, but the central bank has one major reason to not cut rates: The headline inflation which is expected to settle within its 4% target. The clamour for rate cuts had begun on the back of slow economic growth, for which the government has not put forth any fix yet. While many economists hope that the rate cuts, if announced, will aid the economy, others expect the RBI to keep the rates unchanged, at least this time.

Here’s who said what on RBI’s rate cuts

Should cut rates

Surjit Bhalla: The noted economist who was appointed as a member of Prime Minister Narendra Modi’s newly-formed Economic Advisory Council has strongly advocated for rate cuts. Surjit Bhalla said that the only answer to a slow economy is low-interest rates and suggested the RBI to cut policy rates by 100 basis points.

CII: Industry body CII pitched for a rate cut of 100 bps to bosst private investments. “I strongly recommend that there should be a 100 basis points rate cut. We need out of the box thinking. We all talk that the private sector investments should come in and we want the economy to pick up on a high growth trajectory,” CII Director General Chandrajit Banerjee told PTI.

Assocham: Assocham has asked the RBI to cut the interest rates at least by 25 basis points, given the challenges being faced by the economy which needs immediate measures for revival of growth. “At least 50 basis points elbow room can be taken with regard to 3.2% fiscal deficit for the current year and the next financial year,” Assocham said.

Should cut rates but won’t

Rajiv Kumar: NITI Aayog Vice Chairman reportedly wished the RBI to cut rates as petroleum prices are going to stabilise and food inflation is likely to go down, but also said that the RBI would take softer policy stance.

DBS: DBS said that there is pressure on the RBI to ease rates as given the repo rate at 6% vs below target CPI inflation, but it is highly unlikely to cut the rates for now since it has little room from the point of view of inflation, which recently started inching up “might settle within 3.8%-4.5% range for rest of FY18, around RBI’s 4% target. Further, the economic stimulus could eventually end up widening the fiscal deficit, leaving RBI with even lesser room to cut rates, DBS Research said in the note. “Speculation that fiscal consolidation might be delayed or that FY18 deficit target of 3.2% of GDP might be breached, will only leave the RBI more cautious than before,” it said.

Should not cut rates

SBI: The State Bank of India has said that the RBI is likely to maintain status quo on the key lending rate in today’s policy review as it is “stuck in a conundrum” of low growth, mild inflation and global uncertainties. The said that against the background of flexible inflation targeting, the obvious question that arises is choosing between moving towards the 4% inflation target swiftly or just staying within the inflation band of plus/minus 2%, PTI reported.

Morgan Stanley: The global investment firm said that it expects the RBI to stay on hold at the upcoming meeting as rising incoming inflation and projections of further acceleration in inflation ahead will mean that there would be limited space for further easing.

HDFC Bank: The HDFC bank on Tuesday said that it expects RBI to stay on hold on rates despite transitory shocks like demonetisation and the switch to the GST regime. The bank said, “The inflation is likely to cross the 4% mark by November, stay around this level for the rest of the fiscal year, and then perk up further. So going by RBI action as simply a response to inflation data flow and its extrapolation, there is no room for a rate cut, at least in October.”

Asian Development Bank (ADB): The ADB expects the RBI to go for another round of rate cut but not in the upcoming MPC but later in the current fiscal. “With inflation within the central bank target range of 2–6% and economic activity weakening in January–June 2017, the latter part of the fiscal year offer some scope for additional monetary easing,” ADB said in a report.

Reuters Poll: According to the latest poll of 60 economists by Reuters, the “lacklustre growth and inflation hovering below the RBI’s 4% medium-term target would not be enough to drive the RBI into action.” However, it also reported some economists expecting the RBI to cut rates as the country’s growth is below expectations.

RBI, in its last policy review in August, reduced the repo rate by 0.25% to 6%, citing reduction in inflation risks. The rate cut was the first in 10 months and brought policy rates to a near 7-year low. In the same month, the retail inflation rose to a five-month high of 3.36% due to higher prices of vegetables and fruit but still remain below RBI’s 4% target.

(First published on Tuesday, October 3, 2017, on www.financialexpress.com)

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