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Will RBI dash the hopes of rate cut?
Fri, 28 Nov Pre-Open

The past few months have been good for India. Lower inflation, better industrial output and falling crude oil prices have been important contributors of this cheer. These events have already ignited hopes of a rate cut since some time. Undoubtedly, the joint efforts of RBI and government have brought some good news for the Indian economy. Food inflation has remained at much acceptable levels. Plus, global crude oil prices have plummeted quite sharply aiding in descending inflation levels.

However more recently, India's GDP growth is projected shall slow down to levels of around 5% for the quarter ended September 2014, down from 5.7% in the previous quarter. As per reports, the Finance Minister Arun Jaitley will persuade RBI towards the rate cut.

But there is an apprehension whether Mr Raghuram Rajan actually will opt for a rate cut.

Recently, Mr. Rajan had asked in his speech "Will a lower policy interest rate today give him more incentive to invest? We at the RBI think not...We don't believe the primary factor holding back investment today is high interest rates."

We agree with Mr Rajan's take on this to some extent.

What is much needed at this juncture for the Indian economy is to bring in structural changes. The recent improvement in inflation is also function of falling crude prices. And one should note the global commodity prices cannot be controlled and are highly volatile. The government needs to take some hard steps to make major structural shifts in output and employment. And this will lead to a sustained and rapid growth for the country.

For the time being however, we are in favour of a wait and watch approach. We believe that the RBI, as it mostly does, is right in adopting a prudent approach to rate cuts. Also, neither should the government pressurize the RBI to cut rates beyond its comfort zone.

So, despite the rising clamor for interest rate cuts by the RBI, it will be interesting to see what Mr Rajan's decision rates will be in the upcoming monetary policy. Over and above this, the quarter's GDP numbers will an important point, to gauge whether the rate cut is on cards.

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