After the US Fed kept its interest rates unchanged, the possibility of the Reserve Bank of India cutting policy rates this month-end has increased.
Soumya Kanti Ghosh, Chief Economic Advisor and General Manager, Economic Research Department at State Bank of India, said: “Now it is time for the RBI to take a call on rate cut…It is better to act now instead of waiting for a situation that will compel us to act. A good policy in good times leads to better results compared to a good policy in bad times.”
In a report, Ghosh said all the three conditions as indicated by the RBI (to take any action on rate cut) in its last monetary policy statement seems to be fulfilled. Benign food inflation, sufficient transmission of policy rates and spread of normal/excess monsoon over 64 per cent of the country makes a case for at least 25 bps cut in repo rate.
Experts continue to see Consumer Price Index (CPI) inflation undershooting RBI’s 6 per cent objective by about 50 bps in January 2016. This and a dovish US central bank, should make way for a 25 bps repo rate cut at the upcoming RBI meeting.
Despite being under pressure to cut rates, the RBI Governor has maintained that keeping inflation at lower levels is the key. Since January, RBI has cut key policy rate or the repo rate by 75 bps.
Radhika Rao, Economist with DBS group, said that based on domestic developments there is a sufficient case for rates to be lowered. However, she added that RBI Deputy Governor Urjit Patel on Thursday had said that sustained low inflation in the medium to long term and fiscal restraint were key prerequisites to lower the cost of funding. “Whilst these remarks were interpreted as being hawkish, we see this as an attempt to temper expectations of aggressive rate cuts.”
Rao is also of the view that structural tailwinds to India’s recovery by way of crucial reforms are however, on a slow lane, with progress on GST, land acquisition and labour reforms delayed at least until the winter parliamentary session in November/December.