RBI, Still Shy on Rate Cuts

India Today - - UPFRONT - By M.G. Arun

Last month, when In­dia’s GDP growth for the fourth quar­ter of 201617 slumped to 6.1 per cent from 8 per cent a year ago, there were many, es­pe­cially in the gov­ern­ment, who ex­pected the Re­serve Bank of In­dia (RBI) to slash in­ter­est rates in its mon­e­tary pol­icy re­view in June.

But it didn’t hap­pen. The RBI had three rea­sons for stay­ing the course: first, de­spite the fore­cast of a sharp de­crease in in­fla­tion, the mon­e­tary pol­icy coun­cil (MPC) that reviews in­ter­est rates ev­ery quar­ter, re­mains un­sure how long it will last. Sec­ond, it be­lieves other cen­tral mea­sures to boost in­vest­ment are es­sen­tial be­fore rate cuts. Fi­nally, it wor­ries that any pre­ma­ture eas­ing may re­sult in fu­ture rate hikes.

Po­lit­i­cal ob­servers were quick to de­duce a rift be­tween RBI gov­er­nor Ur­jit Pa­tel and the fi­nance ministry in the de­ci­sion, the ru­mours fu­elled by the MPC turning down a meet­ing with fi­nance ministry of­fi­cials on June 1, days be­fore the pol­icy an­nounce­ment.

The gov­ern­ment is un­likely to let this pass qui­etly. Chief eco­nomic ad­vi­sor Arvind Subra­ma­nian ar­gued for a rate cut soon af­ter the RBI an­nounce­ment. Now with CPI in­fla­tion (which ex­am­ines the weighted av­er­age of prices of a bas­ket of con­sumer goods and ser­vices) grow­ing 2.2 per cent in May, the low­est since 2001, and given the gov­ern­ment’s per­sis­tence, ex­perts ex­pect the RBI to ease rates in Au­gust. Prices of pulses, veg­eta­bles and fruits fell sharply in May, more than off­set­ting the slight in­crease in ce­re­als, eggs, meat and fish and pre­pared meals. The fuel price in­dex also fell sharply. “While we have a long held call for a pro­longed pause, we see risks of a rate cut in the Au­gust pol­icy meet­ing,” says Pran­jul Bhan­dari, chief In­dia econ­o­mist at HSBC. In the in­terim, fac­tors like rains and food price move­ments will be closely watched.

2.2 PER CENT the CPI in­fla­tion rate in May, the low­est since 2001

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