Will RBI Rate Cut Do the Trick?

Tue, 2 Feb Pre-Open

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The Reserve Bank of India (RBI) is going to host its bi-monthly monetary policy meeting today. As usual, markets will be keeping their eyes on the decision for interest rates. Many are hopeful for a 25 basis point rate cut. However, RBI governor, Raghuram Rajan, holds a much wider view. As per him, growth through additional debt will hurt the stability of the economy.

One shall note that the central bank kept interest rates unchanged in its December policy review. Will it be different this time? Let's note down some factors that can have the answers...

From Then, Until Now...

As suggested in an article in Livemint, a lot has changed since the last policy meeting. First is the hike in US interest rates by the US Fed (subscription required. The crude oil price has slipped further. Prices of other commodities too have collapsed. Last but not the least- the slowdown in China.

All of the above factors have created more room for a further rate cut by the RBI.

What about Inflation, Factory Output and Exports?

Inflation has been a key factor in influencing monetary policies. While the wholesale price inflation (WPI) is negative, the retail inflation has risen to 5.6% YoY in December. Further, food price inflation has risen to a 10-month high of 6.4% in December as against 6.1% in November. Also, the core inflation (minus petrol and diesel) remains unchanged at 5.4%.

Exports have declined 12 months in a row. Factory output has contracted.

Many are concerned if Indian growth story is losing its charm. A rate cut in this scenario could bring much relief. Will the central bank oblige?

It may, but with a delay. Perhaps Mr Rajan would like to wait until the Budget to get more clarity on Government's fiscal consolidation plan.

As of now, the real concern seems to be liquidity tightness. The same has impacted monetary transmission. A move by RBI to cut CRR (cash reserve ratio) could offer these banks some relief.

We believe that instead of focusing much on the interest rate cuts, India shall act on the current loopholes for a stable recovery. Monetary policies are not the tool to handle the latter. The government will have to implement a series of measures to open up the economy and boost growth. This will free up the RBI to focus on its primary objectives of containing inflation and preserving the value of the Indian rupee.

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