RBI, Still Shy on Rate Cuts

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