A day before the crucial credit policy review by the Reserve Bank of India, the Finance Ministry has indicated that it favours a cut in the key policy rate (repo).
“Crude price has dipped, wholesale inflation has been negative for some time and a better-than-expected monsoon gives hope for a bumper crop. In such a situation, inflation should not be a primary concern for revising the rate,” a key Finance Ministry official, who did not want to be identified, said here on Monday.
Moody’s expects rate-cutWhile most analysts do not expect a rate cut, considering the RBI’s hawkish view on inflation, research firm Moody’s Analytics expects the central bank to cut the rate by 25 basis points (100 basis points equal one percentage point).
The RBI now considers the Consumer Price Index (CPI) instead of the Wholesale Price Index (WPI) to decide on rate revisions, but the WPI still has some impact on deciding the overall monetary policy framework.
Retail inflation in June stood at 5.4 per cent against 5.01 per cent in May; it was 6.77 per cent in June last year. Similarly, retail food inflation rose to 5.48 per cent in June from 4.8 per cent in May, but was lower than the 7.21 per cent in June 2014.
Now, with the prices of vegetables going up, the retail inflation is expected to rise further in the coming months. But the Finance Ministry official said that this is a seasonal phenomenon and in the next few months “prices of pulses and edible oil will drop, and will lower the inflation.”
With higher minimum support price, sowing of pulses and oilseeds has shown good growth. Though the Agriculture Ministry data (as on July 31) said that sowing of pulses and oilseeds recorded a growth of 21 per cent and 9.5 per cent, respectively, the Prime Minister in his ‘ Mann Ki Baat ’ on July 26 had said that sowing of pulses had increased by 50 per cent and that of oilseeds by 33 per cent.
Moody’s Analytics, while expecting a rate cut, points out that the dim forecasts of below-average rains have not happened and the monsoon has been closer to the long-term average and, therefore, an encouraging sign for kharif crop sowing.