With inflation cooling, expectations are high on a rate cut by the Reserve Bank of India, but it is a measure of the monetarist reputation of RBI Governor Raghuram Rajan that most analysts feel the central bank will maintain status quo on policy rates in its policy review Tuesday.Morgan Stanley said in a report: "We believe that RBI is likely to keep policy rates on hold on Dec 2. We assign a very low probability to a rate cut in that meeting.""While a rate cut would help to assuage sentiment, the RBI may choose to defer the decision for the next review," domestic agency Care Ratings said in a note.
The Consumer Price Index (CPI)-based retail inflation eased to a record low of 5.52 percent in October, while the Wholesale Price Index cooled to a 5-year low of 1.77 percent on the back of lower food and fuel prices. The RBI has maintained the benchmark interest rate in all four reviews during the 2014-15 fiscal, citing high inflation.On the other hand, official data on gross domestic product released Friday showed India's growth at 5.3 percent for the second quarter of this fiscal, dropping from 5.7 percent in the quarter before, with factory output logging a mere 0.1 percent expansion.
The bank rate currently stands at nine percent, the repurchase rate at eight percent and the reverse repurchase rate at seven percent. Bank rate is the interest the RBI charges on loans and advances to commercial banks. The other two are its short-and-long-term lending rates.Poor corporate earnings in the September quarter highlighted weak consumer demand, while India's exports slowed in the second quarter after orders from Europe dropped.The finance minister will reiterate his request that Rajan cut interest rates during his scheduled meeting with the RBI Governor a day ahead of the monetary policy review, even as there has been a growing clamour for rate cuts by industry, the government and economists."An important element of the cost structure for manufacturing is interest rates, and given the current inflation situation, the RBI should ease the monetary policy stance as this will give a boost to investment sentiment," industry chamber Ficci president Siddharth Birla told IANS."All signs of a sluggish economy were there -- low credit growth, a limping manufacturing sector, no new major investments, stalled projects, infrastructure bottlenecks, etc," former finance minister P. Chidambaram said in a statement Friday.
The government proposes to move forward on major reform measures like on the GST (goods and service tax) and insurance bills during the ongoing winter session of parliament. The clamour for easing bank rates stretches across the ideological spectrum.Pointing out that there is nothing in macro-economic theory that says the fiscal deficit is not sustainable provided government borrowing is used for investment, Nayyar, a former president of the Indian Economic Association, said : "That raising interest rates will contract inflation is false both in theory and practice. It's time to rethink macro-economic policies by redefining policy objectives or reconsidering policy issues."
"Public investment needs to rise in infrastructure and agriculture, while in the monetary policy, there is the crying need to reduce interest rates to increase investments", he added. The RBI Governor currently holds the key to Prime Minister Narendra Modi living up up to his market-friendly reputation and delivering on his core election promises of growth and economic expansion.