FinMin pins hopes on September for rate cut

The finance ministry on Tuesday hoped that the Reserve Bank of India (RBI) would cut the policy rate next month, as the situation about the monsoon, crop yield and US Federal Reserve’s monetary stance would become clearer then. However, it also said the ministry favoured rate cut this time as well, even as RBI refused to do so.

Top sources in the ministry said though North Block was in favour of a rate cut on Tuesday, but uncertainty over monsoon and inflation came in the way. “You know, our position,” said a source. RBI Governor Raghuram Rajan indicated he could cut interest rates ahead of the next policy review, slated for September 29,depending upon macroeconomic indicators.

“There could be a rate cut by RBI in September as the instance of Federal Reserve would be clear by that time. By that time, the outcome of the monsoon and its effect on crops will also be known,” said an official.

The India Meteorological Department (IMD) had said on Monday the monsoon is expected to be below normal at 84 per cent of the long period average (LPA) as El Nino weather conditions have strengthened. It also retained monsoon in the full season — June to September — at 88 per cent of the LPA. Rains between 94 and 104 per cent of LPA are considered normal.

The consumer price index-based inflation, the main barometer of RBI’s monetary stance, rose to 5.40 per cent in June from 5.01 per cent in May due to high food prices.

RBI had reduced the interest rates by a total of 0.75 per cent in three tranches since January this year. After three cuts in seven months, RBI in Tuesday’s policy decided to keep the repo rate unchanged at 7.25 per cent, as also the cash reserve ratio (CRR) at four per cent.