Why Rajan may cut interest rate today

Most bankers feel that benign inflation and status quo by US Fed have given room for the RBI to cut short-term lending (repo) rate by at least 0.25 per cent to 7 per cent.

Amid expectations of a 0.25 per cent cut in interest rate to spur growth, Reserve Bank of India Governor Raghuram Rajan will on Tuesday come out with the fourth bi-monthly monetary policy for the current fiscal.

While deciding on the key lending rate, he will have to take into account various factors including low inflation, sluggish industrial output, below normal monsoon and most significantly the recent decision of the US Federal Reserve to postpone interest rate hike.

The Reserve Bank Governor has been under pressure from the Finance Ministry as well as the industry to cut interest rate to spur economic recovery and mitigate the impact of slowing China on India.

Most bankers feel that benign inflation and status quo by US Fed have given room for the RBI to cut short-term lending (repo) rate by at least 0.25 per cent to 7 per cent.

Even Finance Minister Arun Jaitley last week asserted that common sense says the interest rates should come down.      

Jaitley had said inflation is ‘very much under control’ and the country is better prepared than most emerging economies to weather the global economic turbulence.

Global turmoil triggered by devaluation of yuan and reports of slowing growth in China has impacted Indian currency and stock markets.

As regards the price situation, the wholesale price index remained in the negative territory for 10 months in a row and stood at (-)4.95 per cent, while the retail inflation based on Consumer Price Index eased to a record low of 3.66 per cent in August.

The first quarter GDP number of 7 per cent was below the market expectation, while industrial output growth in April-July was 3.5 per cent.

India Ratings and Research (Ind-Ra) said it expects the RBI to take a gradual route of repo rate moderation (by 0.25 per cent to 7 per cent) and sound cautious in its tone.

Major lenders like the State Bank of India also expect RBI to lower the repo rate. According to State Bank of India Chairman Arundhati Bhattacharya, there is a space for rate cut as the possibility of food prices going up in coming months is negligible.

"I do still believe that there is a space for rate cut in India. How much is difficult to state at this point of time," she had said.

There is a possibility of 0.25 per cent rate cut by the RBI, Union Bank of India Chairman & MD Arun Tiwari said.

"I see a 25 basis points rate cut on September 29. But there will be no change in statutory liquidity ratio and cash reserve ratio as liquidity in the system is enough," Tiwari said.

Echoing similar views HSBC India country head Naina Lal Kidwai said there is a strong chance of RBI cutting interest rate by 0.25 per cent on September 29 as inflation has come under control.

With decline in inflation and the US Fed handing emerging markets a lifeline by not raising interest rates, there is a 'favourable' environment for monetary policy action by the RBI, Minister of State for Finance Jayant Sinha had said.

"A sharp decline in inflation particularly the GDP deflator should pave way for the repo rate cut," Ind-Ra said.

Earlier this month, the Fed heeded to calls from the World Bank and IMF by deciding not to go for first rate increase in almost a decade, stemming outflows from emerging economies.

On expectation from RBI policy review, Bank of Maharashtra executive director R K Gupta said: "With macroeconomic parameters improving, RBI is likely to cut repo rate.

“Also, there is pressure on RBI to support credit growth which has been muted for some time."

Image: Finance Minister Arun Jaitley (L) and RBI Governor Raghuram Rajan. Photograph: Reuters