New Delhi: After the Reserve Bank of India kept the interest rates unchanged, experts believe RBI has 'limited' scope of monetary policy easing and there is only scope for up to 50 basis points in rate cuts this fiscal.
The RBI in its mid quarterly review yesterday, kept the interest rates unchanged and noted that there are several factors responsible for the slowdown in activity and the role of interest rate is relatively 'small'.
Lauding RBI's decision, HSBC Chief Economist for India & ASEAN Leif Lybecker Eskesen said, "going ahead, the room for rate cuts is very limited, and policy efforts should focus more on deeper rooted structural reforms to boost growth."
"We maintain our call that the room for monetary policy easing is limited and currently only see scope for up to 50 bps in rate cuts this fiscal year," HSBC said.
According to a Standard Chartered research report, the RBI is unlikely to reduce the repo rate in the future unless inflation recedes significantly, due to either external or domestic developments.
"Given our expectation of 7.2 percent year-on-year average WPI, with risks to the upside, it will be difficult for the RBI to reduce interest rates any time soon," the Standard Chartered research note said.
HSBC further said that cutting rates at this juncture would also pose risks given other sources of inflation risks.
The weakening rupee means higher imported inflation, further if the government adjusts the diesel and kerosene prices to contain the subsidy bill, it would inflate inflation in addition to this the excise and service tax rates are going to fuel inflation rates further, it said.
At present, inflation is running high. May WPI inflation rose to 7.55 percent as against 7.23 percent in April. CPI inflation exceeds 10 percent.
"A rate cut at this juncture would have had very little, if any, impact on lending rates given the liquidity deficit and the impaired transmission mechanism as the slowdown in growth has to a large extent been supply driven," HSBC said.
Meanwhile, India's January-March 2012 GDP number was weaker than expected and Industrial production in April was broadly flat over the previous month and last year.
India's growth rate has taken a hit on the back of insufficient progress on deeper structural reform. Growth eased to 5.3 percent as against 6.1 percent in Q4 of 2011 and the lowest reading since 2004.
"In order to improve the inflation-growth trade-off, the Indian economy needs a heavy dose of structural reform, which would increase the potential growth rate over the medium term and also help improve sentiments in the short term, in turn supporting the investment cycle," HSBC said.
First Published: Tuesday, June 19, 2012, 15:55