With inflation untamed, will RBI act freely?

Last Updated: Friday, June 15, 2012 - 12:49

Rohit Joshi/Zee Research Group

New Delhi: The Indian economy is in a precarious situation! The GDP growth in fourth quarter of last fiscal has plummeted to a nine year low, with the April IIP figures posting a meager 0.1 percent rise. The pressure is mounting on the RBI to cut policy rates in order to put growth back on track however accelerating May inflation figure of 7.55 percent has put RBI in imbroglio. But the verdict on rate cut is not yet out, with analysts divided for and against it.

Commenting on the precarious situation of economy and a possible rate cut, A K Prabhakar, Senior vice president, equity research, Anand Rathi Financial Services, said, “Rate cut is not the solution, as the problem is related to the country’s fiscal scenario (fiscal deficit at levels of early 90’s) which has nothing to do with the monetary issues.”

Poor GDP growth, disappointing IIP and lower crude oil prices are the key factors which can prompt RBI to cut policy rates. However, uncomfortable levels of inflation, fragile rupee, and policy paralysis, are some facts which can deter RBI from cutting policy rate on June 18 when it announces the mid-quarterly policy review.

Throwing light on the possible action expected out of RBI, Jyotinder Kaur, senior Economist at HDFC Bank, said, “There would not be a status quo situation. A 25 basis points (one basis point is one hundredth of a percent) cut in repo rate is expected. However, exploiting the option to reduce CRR seems limited.”

Prabhakar at Anand Rathi argued, “RBI will focus more on liquidity front, and on June 18, 50 basis points (half percent) cut in the CRR(Cash Reserve ratio) can be seen, which may be accompanied by a 25 basis point cut in the repo rate.”

“A repo rate cut of only 25 basis points in the current tight liquidity context would be merely symbolic and would not have a sustainable impact on interest rates unless accompanied by aggressive liquidity-enhancing measures, “added Prabhakar.

Another school of thought came from, Sumita Kale, Chief Economist, Indicus Analytics, who averred, “A repo rate as well as CRR cut of 25 basis points is expected out of the event. A repo rate cut gives a strong signal for growth and decline in manufacturing inflation provides a leg room to RBI in tinkering down the repo rate.”

“RBI move would be pretty insufficient as far as long term effect is concerned; this economy desperately requires policy reforms. It seems that after policy paralysis government is facing confidence crisis,” added Sumita.

Not only the economist and stock market veteran are pitching for the rate cut but industry body like Assocham has also sought immediate cut in the short term lending rate and CRR by at least 100 basis points. Department of Financial Services Secretary D K Mittal, too batted for a CRR cut. The country's largest bank, SBI, too requested RBI for a one percent CRR cut and favours CRR cut over repo rate cut.



First Published: Friday, June 15, 2012 - 12:49

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