In­dia’s RBI set for third in­ter­est rate cut of the year

The China Post - - BUSINESS - BY PETER HUTCHI­SON

In­dia’s cen­tral bank is ex­pected to cut in­ter­est rates for a third time in five months when it meets this week, con­fi­dent that in­fla­tion is sta­ble enough to weather the sum­mer mon­soon.

The Re­serve Bank of In­dia (RBI) has al­ready low­ered its bench­mark repo rate, the level at which it lends to com­mer­cial banks, by 50 ba­sis points to 7.5 per­cent this year.

And an­a­lysts be­lieve the RBI will snip rates again at its next meet­ing on Tues­day in a bid to en­cour­age greater lend­ing to busi­nesses and in­creased con­sumer spend­ing, stim­u­lat­ing the econ­omy.

“I ex­pect the RBI to cut the rate by 25 ba­sis points,” Ashutosh Datar, an econ­o­mist at IIFL In­sti­tu­tional Eq­ui­ties, told AFP.

Rupa Rege Nit­sure, chief econ­o­mist at L&T Fi­nan­cial Ser­vices, agreed, say­ing she be­lieved the Mumbai-based bank would opt for a “mod­est” cut.

“Given the un­cer­tainty con­cern­ing oil prices and the de­pre­ci­a­tion in the ru­pee, which have a high in­fla­tion­ary po­ten­tial, I don’t think many peo­ple are ex­pect­ing a 50-point cut,” she told AFP.

The RBI, led by Gover­nor Raghu­ram Ra­jan, sliced 25 ba­sis points off the repo rate in Jan­uary — the first re­duc­tion in 20 months — be­fore a sur­prise re­peat cut in March.

It kept the key rate un­changed last month, cit­ing in­fla­tion con­cerns and a fail­ure of most com­mer­cial banks to pass on lower bor­row­ing costs to cus­tomers in Asia’s third-largest econ­omy.

But Nit­sure said 20 banks were now heed­ing Ra­jan’s call to re­duce their base rate and an­other cut would mo­ti­vate oth­ers to “fol­low suit.”

‘In­fla­tion not a threat’

“There is a need for bor­row­ing costs to come down be­cause de- mand is so low and in­fla­tion is not a threat,” she said.

Prime Min­is­ter Naren­dra Modi’s right-wing gov­ern­ment swept to power last year pledg­ing to re­form and re­vive a flag­ging econ­omy.

It re­ceived a ma­jor boost on Fri­day when data showed that In­dia’s econ­omy grew 7.5 per­cent in the first three months of the year, over­tak­ing China.

The gov­ern­ment would like the RBI to cut rates fur­ther but Ra­jan has so far made con­trol­ling in­fla­tion a pri­or­ity, set­ting a tar­get of bring­ing it con­sis­tently be­low six per­cent by Jan­uary next year.

In April, con­sumer in­fla­tion fell to a four-month low of 4.87 per­cent, well within the RBI’s tar­get range. Last week In­dia’s top eco­nomic ad­vi­sor sug­gested that had “im­pli­ca­tions for in­ter­est rates.”

Arvind Subra­ma­nian added that food stocks were plen­ti­ful enough to help con­tain in­fla­tion even if the three-month mon­soon, ex­pected im­mi­nently, is weak­ened by the El Nino weather phe­nom­e­non as fore­cast.

Mon­soon rains are vi­tal for In­dian crops and a par­tic­u­larly dry sea­son can re­duce farm out­put, rais­ing food prices which can be crip­pling for the tens of mil­lions of In­dia’s poor.

“It is pos­si­ble to con­tain (in­fla­tion) go­ing for­ward even if the mon­soon is not go­ing to be as good,” Subra­ma­nian added.

Datar, the econ­o­mist, said the cur­rent re­tail in­fla­tion level “gives the RBI enough head­room to be able to cut rates to try to stim­u­late de­mand.”

He added that “if mon­soon in­fla­tion is not as bad as feared then they’ll prob­a­bly cut them again later in the year.”

Not all ex­perts agreed that a cut this week would be the right way to go though. Arun Singh, se­nior econ­o­mist at Dun & Brad­street, told AFP the mon­soon’s in­fla­tion­ary “risk” meant the RBI should wait un­til it had passed.

AFP

An In­dian ven­dor, right, at­tends to a cus­tomer at his road­side fruit stall in Mumbai on May 13.

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