Will RBI cut rates on June 6?

The RBI is understood to be dithering since it would want more clarity on the cost of the fiscal policies the new government would undertake before it decides to cut rates, even though it has pencilled in a lower gross domestic product growth rate for this fiscal year.

Top finance ministry and Reserve Bank of India (RBI) officials have held key meetings recently to hammer out a consensus on the economic outlook, just ahead of a new government coming to office.

But the prospect of a rate cut by the RBI at its next review of the monetary policy on June 6 does not appear promising.

The finance ministry officials have tried to impress upon the RBI the need to cut the benchmark rates.

The RBI has, in turn, asked for clarity on the possible trend in government borrowings for the next few weeks.

An official in the know said since the change in governors at the RBI, there is further frank exchange of views than it was earlier.

In November last year, Urjit Patel had stepped down two years into his term as RBI governor and the government had appointed former economic affairs secretary Shaktikanta Das in his place.

The meetings between Mint Road and North Block come after a long election season lasting for about two months.

The economy has been buffeted meanwhile by the worsening trade relations between the US and China, a dip in the forecasts about the growth rate of the Indian economy, with all indicators except inflation, moving southward, and the tightening of liquidity in the credit market.

“We discussed the possibility of some more non-banking financial companies biting the dust before we come out of the current mess,” said the official.

The RBI is understood to be dithering since it would want more clarity on the cost of the fiscal policies the new government would undertake before it decides to cut rates, even though it has pencilled in a lower gross domestic product growth rate for this fiscal year.

Among the brokerages and banks, there are also differing opinions on whether the RBI would cut rates, in addition to the recent 50-basis points (bps) cut it has already announced since February this year.

While S K Ghosh, group chief economic advisor of State Bank of India, has in a note pointed out: “We are pencilling in a larger rate cut (in excess of 25 bps) by the RBI in the forthcoming policy,” Saugata Bhattacharya, chief economist of Axis Bank - after a survey of the economic indicators - is not so sanguine.

Photograph: Reuters