Home/ Markets / Mark To Market/  Three reasons to convince RBI to go for a policy rate cut in June

Mumbai: "Better three hours too soon than one minute too late." If the Reserve Bank of India (RBI) needs inspiration to decide on policy rate cuts, William Shakespeare can come to the rescue.

However, there is a bunch of data too that can convince the central bank to not wait till August. The first one is of course growth in industrial output. The Index of Industrial Production (IIP) grew at a measly 0.1% in February, the lowest since 1991. Of course, some of it is due to the base effect as this comes on top of a healthy 6.88% growth in the previous year. But we should also consider the fact that growth was revised downwards for January and consumer non-durables growth is weakening consistently.

Put these two alongside a weak Wholesale Price Index-based inflation rate for manufactured goods and it is easy to conclude that Indian companies still don’t have enough pricing power to pass on their input cost pressures to consumers. As analysts at Nomura Securities Co. Ltd said in a recent note, “We see signs of a growth slowdown spilling over from consumption to investment, as capital and intermediate goods output sharply contracted, and infrastructure & consumption output growth slowed."

Investment demand is anaemic. The fourth quarter data from the Centre for Monitoring Indian Economy (CMIE) showed that investment into new projects has dropped a whopping 55% year-on-year. Some of it could be holding back ahead of elections, but new investments have hardly grown in the last eight quarters, reflecting the weak investment demand.

Clearly, growth needs a stimulus from monetary policy, and RBI governor Shaktikanta Das’s speech imploring global central banks to revive growth through coordinated action shows that RBI is willing to do its bit.

The third factor is RBI’s own forecast of an inflation print below 4% for FY20.

The risks to inflation are indeed oil prices, monsoon and fiscal deficit. Of this, oil prices have begun climbing recently. But, Nomura expects the oil price rise to bring down core inflation by curbing demand. That would mean headline inflation would hardly rise to uncomfortable levels. The India Meteorological Department (IMD) has forecast a near-normal monsoon, confirming RBI’s assumption underlying its inflation projection.

That leaves the biggest joker in the pack—fiscal deficit. Unfortunately, RBI has taken the government’s projection at face value, but as election campaigns show, it would be difficult for the elected government to ignore populist measures altogether.

However, there is little reason for RBI to wait until August on the pretext of having more clarity on these factors, especially when growth needs support and inflation is likely to be within mandate.

Know your inner investor Do you have the nerves of steel or do you get insomniac over your investments? Let’s define your investment approach.
Take the test
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Updated: 16 Apr 2019, 08:34 AM IST
Recommended For You

Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

Let’s get started
Get alerts on WhatsApp
Set Preferences My Reads Watchlist Feedback Redeem a Gift Card Logout