Research firm Moody’s Analytics today said that the Reserve Bank is likely to cut the benchmark rate by 0.25 per cent in its monetary policy review tomorrow as inflation is likely to remain subdued on the back of average rainfall and lower commodity prices.
“The Reserve Bank of India could deliver fireworks in its monetary policy meeting on Tuesday by cutting the repo rate by 25 basis points to 7 per cent,” it said in a report, ‘Asia Spotlight: More Rate Cuts in India’.
Moody’s Analytics is a division of Moody’s Corporation and is engaged in economic research and analysis.
It said dim forecasts of below-average rains have not come to fruition and rainfalls have been closer to the long-term average with encouraging signs for kharif crop sowing.
“There has been double-digit increase in areas sown compared with last year for major kharif crops. And although the monsoon season is not over yet, we believe RBI has an opportunity to stay ahead of the curve and cut rates because better food supply will likely cap inflation,” Moody’s Analytics said.
Monsoon rainfall has picked up in July and the pace is likely to continue in August. The Met department had in June projected a deficient monsoon this year.
Inflation pressure, crude oil prices
The research firm also said recent global developments also suggest limits to inflation pressure, with the tumbling of global commodity prices, particularly crude oil, on the back of Iran nuclear deal.
“This would help ease RBI’s concerns of rising fuel costs. Overall, the subdued inflation profile suggests RBI should lower rates and focus on economic growth,” Moody’s Analytics said.
It said private investments have not picked up as the economic engine is yet to fully fire without key reforms.
Besides, production momentum is weak, auto sales are low, and a secular upward trend in credit growth remains elusive.
“But we believe that favourable supply-side developments in recent weeks prescribe another rate cut in August,” it added.
Monetary policy
RBI Governor Raghuram Rajan had in June said the future trajectory of the monetary policy will depend on monsoon, the way the government manages shocks, if any, emanating from it and crude prices. RBI has cut rate by 0.75 per cent in January-June.
RBI is scheduled to announce its third bi-monthly policy review tomorrow. The industry has been pitching for a rate cut to ease the cost of capital.
The wholesale price index (WPI)-based inflation has remained negative for the last eight months and stood at negative 2.4 per cent in June.
CPI inflation, however, accelerated to an eight-month high of 5.4 per cent year-on-year in June compared with 5.01 per cent in May. RBI takes into account CPI or retail inflation in deciding its monetary policy action.