The Reserve Bank of India (RBI) cutting the key policy repo rate from 7.75% to 7.5% with immediate effect is a clear signal that the central bank and the Narendra Modi government are finally on the same page on cutting interest rates to boost growth.
The decision will not only soothe the nerves of the middle class after a disappointing budget last week in terms of any benefits to facilitate more money in their hands as the RBI is expected to cut rates further during the year by at least 0.5% more, which will reduce the EMIs; it is also a positive indication to the industry that the RBI is ready to help investments riding on the government decision to go for additional public investment.
The 25 basis points cut today, has come within two months of the RBI reducing the repo rate by the same amount on January 15, 2015.
The indications of possible rate cuts further came also in its sixth bi-monthly monetary policy statement of February 3 as the RBI said it will keenly monitor the revision in the consumer price index (CPI) with regard to the path of inflation in 2015-16 as well as the Union Budget for 2015-16.
The RBI release announcing the rate cut decision points out, “The new CPI rebased to 2012 was released on February 12, 2015. Inflation in January 2015 at 5.1 per cent as measured by the new index was well within the target of 8 per cent for January 2015. Prices of vegetables declined and, hearteningly, inflation excluding food and fuel moderated in a broad-based manner to a new low. Thus, disinflation is evolving along the path set out by the Reserve Bank in January 2014 and, in fact, at a faster pace than earlier envisaged”.
But the central bank has also cautioned that the uncertainties surrounding any inflation projection are, not insignificant — oil prices have firmed up in recent weeks, and significant further strengthening, perhaps as a result of unanticipated geo-political events, will alter the inflation outlook.
Though the international commodity prices are expected to remain benign due to the sluggish global demand, domestic food prices are likely to be affected by the seasonal upturn, going ahead.
The spillover of the volatilities in the international market is also an important factor to watch out for any further decision on the rate cuts.
The biggest pressure on inflation, that will play a crucial role in the rate reduction, though, would be a pick- up in demand due to the growth picking up.
The government’s role would be crucial here in addressing the concerns on inflation by maintaining the fiscal consolidation path and supporting the RBI stance through fiscal policies.
“Going forward, the RBI will seek to bring the inflation rate to the mid-point of the band of 4 +/- 2 per cent provided for in the agreement, i.e., to 4 per cent by the end of a two year period starting fiscal year 2016-17,” the RBI has said.
It has also made it clear that, “Further monetary actions will be conditioned by incoming data, especially on the easing of supply constraints, improved availability of key inputs such as power, land, minerals and infrastructure, continuing progress on high-quality fiscal consolidation, the pass through of past rate cuts into lending rates, the monsoon out-turn and developments in the international environment”.