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Business News/ Money / Personal-finance/  Late monsoon, rising prices may further delay rate cut by RBI: report

Late monsoon, rising prices may further delay rate cut by RBI: report

Apex bank is working on higher transmission of monetary easing, however, the banks are not doing enough

Aniruddha Chowdhury/MintPremium
Aniruddha Chowdhury/Mint

The likely build-up of a scenario of delayed monsoon and hardening of prices might lead to a longer than expected pause in rate cuts by the Reserve Bank of India (RBI) A report by Dun & Bradstreet, D&B Economy Observer, said that it is not only the rate cut but the transmission of the same that will be in focus in the near term as indicated by the RBI.

The sharp rise in Consumer Price Index (CPI) inflation reinforced concerns regarding inflationary pressures. All eyes are now set on the monsoons as it could have potential inflationary or disinflationary pressures. The onset of monsoon has been delayed for three years in a row now. With 25% deficit in rainfall during the first two weeks in June 2016, the sowing of kharif crops is likely to be impacted. The greatest impact of this will be on the sentiment, and hence, on inflationary expectations.

While CPI inflation was at a 21-month high in May 2016, Wholesale Price Index (WPI) inflation has been positive for two months after 17 months of decline. There are certain upside risks to inflation which emanates from rising international commodity prices, particularly crude oil, implementation of the 7th Pay Commission and the increase in minimum support prices of certain commodities of for the kharif season.

Steps taken so far

Measures have been taken by the RBI to ensure effective transmission of the policy rate cut. Reviewing the implementation of the marginal cost lending rate (MCLR) framework by banks, ensuring more liquidity in the banking system and reducing volatility in the call money market, among other things, is expected to provide flow of capital to productive sectors of the economy. Currently, there has been significant focus on the availability of credit for the industry to thrive. Credit disbursement to the industry remains weak.

The non-performing assets (NPA) levels in the banking system have been increasing especially in the infrastructure sector.

The industrial growth story still remains mired in a difficult situation given protracted weakness in exports and weak rural demand.

Notwithstanding, the fact that the government has been undertaking various measures to de-bottleneck the stalled projects (stalled projects declined significantly in recent period), it would take a considerable time for the projects to get rolling and investment activity to gain traction. While lower capacity utilisation has led to restrained capacity expansion among the manufacturers, lower private sector participation has hindered traction in investments in the infrastructure segment.

With the government’s commitment to stick to a lower fiscal deficit target, foreign dircet investment will play an important role for acceleration in investments.

Interest rate has been an important channel of monetary policy transmission. Adjustments in the policy interest rate, for instance, directly impacts short-term money market interest rates which subsequently transmits policy impulse to the wide spectrum of interest rates in the financial system—deposit and lending rates. This in turn affect consumption, saving and investment decisions of economic agents and eventually its final targets—output, aggregate demand and inflation.

RBI adopted an anti-inflationary stance between September 2013 and January 2014 to rein in expectations and impart credibility to its inflation targets. Subsequently, it embarked on a rate easing cycle from January 2015. Three broad factors—fall in the inflation rate below the target level set by RBI, continued windfall from lower global oil and commodity prices and hence fall in inflationary expectations, and a need to push up the pace of domestic demand —influenced the policy decision.

Edited excerpts from D&B Economy Observer.

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Published: 22 Jun 2016, 07:05 PM IST
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