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Economists expect Reserve Bank to cut rates by December

Economists expect Reserve Bank to cut rates by December
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First Published: Tue, Aug 19 2008. 10 44 PM IST

Updated: Thu, Aug 21 2008. 11 58 AM IST
New Delhi: Industry economists have said the Reserve Bank of India, or RBI, may cut interest rates as early as December if oil and commodity prices slide further and inflation—running at a 16-year high of 12.44%—declines.
“The RBI for once may tighten policy rates in October, maintain a neutral stand for some time and start cutting rates before the end of the calendar year,” said Abheek Barua, chief economist at HDFC Bank Ltd.
The global monetary situation is changing with central banks focusing more on economic growth, Barua noted, adding that RBI doesn’t deviate from this. “It has always fallen in line with this trend.”
Bank of England and European Central Bank have cut rates, and Reserve Bank of Australia and Bank of Canada are expected to follow suit before December.
A senior economist with a credit rating agency agrees with Barua’s prognosis. “I expect the RBI to revise interest rates early next year. Once inflation comes down substantially, growth concerns will override inflation concerns,” he said, requesting anonymity.
The crude oil basket for India—that peaked at $142.04 a barrel on 3 July—has fallen to $107.93 a barrel on 15 August. The price of gold has also declined from a peak of Rs13,764 every 10gm on 15 July to Rs11,410, on 18 August. Prices of silver and copper have also been falling.
However, the decline in interest rates is unlikely to be as sharp as the hike, Barua said. “The rate cuts are not going to be sharp, as India is certainly not going into a recession.”
“The RBI may do it in a gradual manner with a 25 basis point cut in repo rate as well as in the cash reserve ratio (the money banks are required to park with RBI that is currently 9%),” he said.
This year alone, the central bank has raised the repo rate (its overnight lending rate to banks currently at 9%) by 125 basis points within the two months of June and July. A basis point is one-hundredth of a percentage point.
Earlier this month, finance minister P. Chidambaram had indicated interest rates would soften sooner than later. “These interest rates will not remain high forever... we will go back to moderate and normal interest rates hopefully in about six months to a year,” he had said.
C. Rangarajan, former chairman of the Prime Minister’s economic advisory council, said while releasing India’s Economic Outlook report on 13 August that there would be downward pressure on interest rates. Even bankers such as O.P. Bhatt, chairman of State Bank of India, the country’s biggest lender, recently said interest rates have peaked.
RBI officials couldn’t immediately be reached for comment.
Some experts, however, differ. “It is still not clear whether the downturn in oil prices is enduring or temporary. We have also not fully passed on the rise in oil prices to the consumers unlike in most other countries,” said Subir Gokarn, chief economist for the Asia-Pacific region at credit rating agency Standard and Poor’s. “I do not think the (interest rate) cycle turning in India any time soon. At best, the RBI may maintain a neutral position from January onwards.” Gokarn added that although the policy rate may not change, market rates may decline in the third quarter of the current fiscal year to March 2009 due to substantial fall in demand for credit.
Another economist with a multilateral agency in India, who did not wish to be named, agreed.
“It is too early to say that interest rates will take a downward trajectory at this moment of time when inflation is yet to peak. If inflation spirals, then the RBI may be forced to tighten interest rates further,” he said. “Those who are foreseeing interest rates falling next year are making huge assumptions that oil prices will come down further and the monsoon will be good.”
RBI’s tight monetary policy, driven largely by inflation concerns, has hurt economic growth prospects and the growth is expected to moderate to 7.7% in 2008-09 from 9.1% a year ago, according to the Economic Outlook.
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First Published: Tue, Aug 19 2008. 10 44 PM IST