RBI seen going for rate cut in August MPC meeting
Record-low inflation and industrial growth slipping below 2% has put pressure on RBI to go for a rate cut in the monetary policy committee meeting on 1-2 August
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New Delhi: With inflation falling to record low levels and industrial growth slipping to below 2%, bankers and economists feel the pressure has increased on the Reserve Bank of India to go for a policy rate cut in the monetary policy committee meeting next month.
The six-member monetary policy committee (MPC) headed by RBI governor Urjit Patel will meet on 1-2 August for the third bimonthly monetary policy review of 2017-18. The MPC in its previous review in June had retained the repo rate at 6.25% for the fourth straight time citing risk to inflation.
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Private sector Kotak Mahindra Bank is of the opinion that since RBI has revised down its inflation trajectory sharply in the June policy, and given that inflation reading, the central bank has some room to be accommodative. “We expect the MPC to cut repo rate by 25 bps in the August meeting,” the bank said in report. Bank of America Merrill Lynch Global Research too expects the MPC to cut rates by 25 basis points.
One basis point is one-hundredth of a percentage point.
An State Bank of India report said that most inflation risks are now on the downside and expect the retail inflation to be sub-2% for the next month, sub-3% for August-September and sub-4% for October-November and 4-4.5% between December and March. For 2017-18, CPI inflation average could thus be below 3.5% with a downward bias, the report added.
The retail inflation, which RBI mainly factors in while deciding interest rate, has declined to historical low of 1.54% in June. The wholesale price inflation for the month too has dropped to an eight-month low.
Industry body Confederation of Indian Industry (CII) is of the view that declining inflation, which has been undershooting RBI’s inflation target by a large margin, should induce RBI to resume its rate easing cycle. CII said it “strongly recommends” a rate cut of 50 basis points in the forthcoming monetary policy to provide a fillip to demand.
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Commenting on the retail inflation data, chief economic adviser Arvind Subramanian had said the “paradigm shift” in inflationary process has been missed by all, who have made “systematic inflation forecast error”, apparently referring to RBI.
In the MPC, Urjit Patel had argued for avoiding “premature policy action” and waiting for more inflation data. “Incoming data is expected to provide greater clarity on the durability of recent food and non-food disinflation,” he had opined.
One of the MPC members Ravindra Dholakia, however, had advocated a 50 basis point cut in the repo rate, saying several noteworthy developments recently on prices and output fronts warrant a decisive policy action.