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Will an interest rate cut follow?
Dec 1, 2014

India's GDP has slipped to 5.3% in the quarter ending September, as compared to 5.7% in the preceding quarter. This has come along with the data that inflation for September quarter has slowed to 3.86%, lowest in last five years. With huge focus on growth and inflation data relatively benign, will Mr. Rajan give in to the demand of a rate cut? Well, that is something we will get to know tomorrow. But here are our views for now.

Most of the decline in inflation has come from the agricultural segment. Food prices are something subject to huge volatility, relying more on monsoons and with little control of policies. Another key reason for decline in inflation has been easing oil prices, something that is highly volatile and should not be the basis of key policy decisions. Another thing that should be kept in mind is the base effect (inflation as per GDP deflator fell sharply in quarter ending March 2014). With oil prices easing, overall consumption in the economy is likely to grow which may cause prices to go up again. Last but not the least, as far as investment growth is concerned, it is the lack of proper policies that have been the real hindrance than the level of interest rates. It is better not to take our eyes off financial stability while choosing quarterly growth and inflation statistics to justify rate cut. A hasty decision supporting a rate cut will put in vain all prior efforts by the central bank to ensure stability in the Indian economy.

Data Source: Firstpost

This Chart Of The Day was published in The 5 Minute WrapUp - Time to restrict the reckless capitalist...

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1 Responses to "Will an interest rate cut follow?"

js dua

Dec 1, 2014

Dear Sir,

Given the inflation coming under control and Petro products prices easing due to increased production of shale gas in USA and refusal by OPEC to cut productions; Mr Rajan may come under pressure of vested interests to reduce interest rate. In my opinion it will be counter productive because easy money availability will not necessarily come in more capital goods manufacturing because there is already over capacity and less global demand of the goods produced by capital goods. What prevents such end product manufacturers to import capital goods at much cheaper costs and perhaps of equal and better quality thus negating the whole idea of interest rate cuts. Other issue is people investing in unproductive assets like cars and homes for long term safety. Interest rate cut may not result in increase in manufacturing sector and employment generation which is the need of the hour.

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