RBI May Cut Interest Rates; Inflation Down | SupportBiz

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RBI May Cut Interest Rates; Inflation Down

 
The finance minister says overall inflation continues to moderate
Inflation based on the consumer price index (CPI) declined to a nine-month low of 3.66 percent in August from 3.69 percent in July, but the rate of food price rise went up to 2.20 per cent from 2.15 per cent.
 
This presents a difficult choice to the Reserve Bank of India (RBI) while deciding its monetary stance, as the monsoon has weakened in August and September and may harm the rabi (winter) crop. Economists expect the central bank to cut the policy interest rate by a quarter of a percentage point in its monetary review later this month to revive investment. But much of this would also depend on the US Federal Reserve’s decision on key rates on September 17. Finance Minister Arun Jaitley said that overall inflation continues to moderate, though some segments might go up due to a weak monsoon.  
 
Wholesale prices declined for the tenth consecutive month in August and at a much steeper rate of 4.95 per cent than 4.05 per cent in July. Here also, there was a sharp spike in the prices of onions and pulses, by 65.29 per cent and 36.40 per cent, respectively. Milk prices accelerated as well.
 
The price rise in pulses in the CPI rose from 22.88 percent in July to 25.76 percent in August. Specific vegetable prices like those of onions are not provided in the CPI, but vegetables as a category saw a slowing decline in prices at 6.36 percent in August, against 7.93 per cent in July.      
 
“Overall inflation continues to moderate and seems to be under control,” said Finance Minister Arun Jaitley. He, however, did not overtly indicate his views on RBI’s rate cut.
 
Experts said the dry spell during August and September would hurt the rabi crop. India Ratings said the rabi crop relied on retained soil moisture and reservoir water. “The water level in the 91 major reservoirs was 92.92 billion cubic meters on September 3, 16 percent lower than in the corresponding period last year as well as the average of the last decade,” it said.
 
Monsoon rainfall up to September 2 was 12 percent below the long period average. The worst-affected part of the country is the south where over a quarter of the districts in Telangana, Tamil Nadu, Karnataka and Kerala have received deficient rainfall.
 
The acreage of most Kharif crops was better than last year’s, and the summer harvest may be slightly higher than in 2014.
 
“Continued decline in inflation levels underscores the need for an urgent revival in consumer demand. This would lead to better capacity utilization which in turn would spur investments. Amidst the prevailing global headwinds, these are the most critical factors for firming up India’s growth aspirations ”, said Jyotsna Suri, President, FICCI. 
 
“India remains a net importer of key commodities and given the muted global prices, the possibility of any immediate risk of importing inflation remains minimal. Under the present circumstances, it would be most appropriate for the Reserve Bank of India to give weight to growth considerations and announce a deeper cut in the policy rate on September 29, 2015. We hope that the Reserve Bank of India and the Banking community will coherently work towards lowering of lending rates”, added Suri. 
 
Richa Gupta, senior director, Deloitte in India, said, “There were pockets of pressure from items like pulses... It is important to note that the coming months could see some spike in retail prices of vegetables with subpar rains accentuating inflationary tendencies, something that the RBI would keep an eye on. Overall, the possibility of some easing of rates has increased as the inflation trajectory is lower than what the RBI had earlier anticipated. That said, the focus would now be on the crucial Federal Reserve meeting on September 17.”
 
Pointing out that CPI inflation has printed mildly higher than her expectation of 3.5 per cent on account of a stronger than anticipated uptick in the known concern areas of pulses and vegetables, ICRA senior economist Aditi Nayar said CPI data lends support to the expectation of a repo rate cut in the RBI’s upcoming policy review.  
 
Core CPI inflation — inflation in manufactured inflation minus that in food — fell to a series low of 4.13 percent, while core WPI deflation declined to a series low of 1.86 percent, said a note by YES Bank.  
 
Chief Economic Advisor Arvind Subramanian said, “ the key point is that the core momentum has decelerated over the last three months. That is also an encouraging sign of abating inflationary pressure.”
 
The RBI is scheduled to review its monetary policy on September 29. It has not ruled out cutting the policy rate in between if the economic data suggests such a move.
 
“The inflation trajectory is below the RBI’s estimated trajectory. We expect a 25 basis point (bps) — a basis point is a hundredth of a percentage point — rate cut in the September policy review,” said A Prasanna, chief economist, ICICI Securities Primary Dealership.
 
“The CPI reflects a slowdown in demand. This and the recent fall in global crude oil prices have opened up space for another 25 bps rate cut in September,” said Rupa Rege Nitsure, group chief economist, L&T Financial Services.
 
Industrial output grew 4.2 percent in July, slower than the 4.4 percent in June. The Index of Industrial Production was revised from 3.8 percent growth estimated earlier for June and the data for July could be interpreted as an improvement on provisional estimates.
 
Economic growth has slowed in the first quarter of 2015-16 to seven per cent from 7.3 per cent in the fourth quarter of the previous financial year.