RBI rate cut expectations grow

Observers point to recent IIP, CPI data; however, some believe such a move might not happen till October

Recent data pointing to a slowing in industrial production growth and to a fall in retail price inflation has given room to the Reserve Bank of India (RBI) to cut its policy rate at the review meeting on August 2, believe many economists and bankers.

Not all share the belief. And, even those who think the RBI will cut the rate add that the lower borrowing cost will not be able to revive investment or credit growth (which fell to a 40-year low of 5.1 per cent in 2016-17) in a hurry.

The Index of Industrial Production expanded 1.7 per cent in May, lower than the revised 2.8 per cent rate in April. Consumer Price Index (CPI) inflation was down to a record low of 1.5 per cent in June from 2.2 per cent the previous month.

Soumya Kanti Ghosh, State Bank of India group chief economist, said it will very difficult for the RBI to find reasons for not cutting the policy rate. It will cut the rate by at least 25 basis points (bps), he said.

Manoranjan Sharma, chief economist at Canara Bank, said a rate cut of 25 bps in August was a given but a pickup in credit is a function of several factors, not only softening of interest rates. He also doesn’t expect any immediate pick-up in credit growth.

Meanwhile, some other economists who’d earlier expected a pause have changed their stance. “We are changing our rate call after release of the June CPI inflation data,” said Kaushik Das, chief economist at Deutsche Bank.

JPMorgan expects a 25-bps cut in August, but adds the timing is a “close call”. With the impact of goods and services tax (GST) on inflation expected to be modest, JPMorgan expects headline CPI inflation to average close to 4 per cent in the first quarter of calendar 2018, in line with the RBI’s target.

Saying the balance of possibility had shifted to a 25 bps cut in the policy rate, Aditi Nayar, principal economist at Icra, said this would also not be able to push investment. “It would only lead to cut in debt service cost. This would not address the issues of over-leveraged debt and unwillingness on the part of banks to lend,” she said.

However, there are differing expectations, too. CARE Ratings’ Chief Economist Madan Sabnavis said there might not be any rate cut in the August review and the MPC might wait for October to gauge the moves of the US Fed, the GST impact on prices and the effect of the HRA increase.

D K Srivastava of consultants EY said the fall in CPI inflation was primarily because of deflation in food items and within that a double-digit deflation in pulses and vegetables.