New Delhi: Data of factory output in January and retail inflation in February to be released today may decide whether the Reserve Bank of India (RBI) will be persuaded to cut policy rates on 5 April for the second consecutive time, ahead of general elections beginning 11 April.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on 7 February changed its stance from calibrated tightening to neutral and cut the policy rate by 25 basis points on the back of benign headline retail inflation and slowing global growth.

RBI governor Shaktikanta Das said at that time that the shift in the stance of monetary policy provides flexibility and the room to address challenges to sustained growth of the Indian economy over the coming months, as long as the inflation outlook remains benign. “The decisions of the MPC in this regard will be data driven and in consonance with the primary objective o monetary policy to maintain price stability while keeping in mind the objective of growth," he said.

Data released by the Central Statistics Office last month showed retail inflation stood at 2.05% in January, against the 2.11% in December, while factory output growth recovered to 2.4% in December from 0.3% in November. If both these macro-economic indicators continued to remain subdued, it will help the case for another round of policy rate cut by the RBI and may lead to interest rate cuts by commercial banks.

RBI governor Das, in fact, met bankers last month to nudge them to cut interest rate after conceding that monetary policy transmission is a concern for the central bank. However, the bankers were reluctant to immediately pass on the benefits of repo rate cut, holding that the deposit rates remain elevated and the liquidity situation remains tight.

However, the recent move by the State Bank of India to link interest rate on saving bank deposits and short-term loans above 1 lakh to the repo rate is seen as a positive move towards quicker monetary policy transmission. Another round of rate cut by the RBI in such a scenario may force banks to pass on the benefit of cheaper cost of funds to the public through lower interest rates on loans.

In the last meeting of the Monetary Policy Committee, all members agreed that food inflation will remain benign for the next 12 months, even though they expected prices of vegetables to bounce back. But what spooked everyone was the threat of a global growth slowdown and the probability of it adversely affecting the Indian economy, through the trade and investment channel.

The base effect for IIP, or index of industrial production, which turned adverse starting November, is expected to continue for the rest of the financial year ending March. Average IIP growth in the second half (October-March) of the last fiscal, at 6.1%, was much higher than the first half (April-September) at 2.6%. Average IIP growth in April-December in the current fiscal is 4.6%, against 3.7% a year ago.

India’s GDP slowed down to a five-quarter low at 6.6% in the December quarter and is expected to further slowdown to 6.4% in the March quarter. In such a scenario, the RBI is likely to keep its focus on growth concerns rather than on inflation.

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