Spotlight on Subbarao: Rate cut likely despite inflation concerns

The February wholesale inflation print has come in a tad higher than expected, at 6.84 percent, but indications are anything to go by, this figure and the retail inflation spike may still not deter the Reserve Bank of India (RBI) from effecting a cut in the benchmark repo rate when the central bank brass meets on 19 March to review the monetary policy.

This, given Subbarao’s earlier refusal to play along with the finance ministry and cut rates, may seem interesting, but this time the RBI governor does have what he sees as enough credible evidence which may lead him to give a further helping hand to Finance Minister P Chidambaram’s efforts to bring the economy back to a stronger growth trajectory.

[caption id=“attachment_660774” align=“alignleft” width=“380”] The inflation figure is far higher than the RBI ‘comfort level’ of 5 percent.Reuters[/caption]

The RBI governor’s words have always been keenly weighed and dissected by the market, and it was no different this time round, when Subbarao told an audience at the London School of Economics (LSE) that Chidambaram had presented a “very responsible Budget”. He also gave a firm thumbs-up to the FM’s steps over the past six months at containing the fiscal and current account deficits.

Read with these pronouncements, Thursday’s slightly higher inflation number does not appear to have thrown too many calculations off gear. Besides, analysts have pointed that this higher than expected print is largely on account of the pricing in of the diesel price increase. The lower inflationary trend on the manufacturing side has also been seen as a welcome relief, giving RBI some elbow room to cut rates.

Indranil Pan, chief economist at Kotak Mahindra Bank, for instance, continues to bet on a 25 basis point rate cut despite the higher retail and wholesale inflation figures.

In an earlier article, Firstpost has also argued why RBI may tilt in favor of a 25 bps cut on 19 March. Says Pan: “Inflation is a bit higher than expected, but it is heartening to note that manufacturing inflation has been contained.”

Pan says, despite the upward surprises to CPI and WPI inflation - both caused by food - he expects the RBI to effect a 25 basis point cut next week.

Speaking to CNBC-TV18, C Rangarajan, the chairman of the Prime Minister’s Economic Advisory Council, also hinted that RBI may have some room for easing, but also said the repo rate was a signal rate and other monetary measures may be required by the central bank.

Bankers have been talking of a liquidity squeeze, given the fact that inter-bank borrowing is much higher than normal and this time of year sees an annual liquidity crunch owing to tax payment by corporates. Bankers therefore feel a cut in the cash reserve ratio (CRR) is also warranted if liquidity is to be eased.

The inflation figure, however, is far higher than the RBI ‘comfort level’ of 5 percent. Even at the LSE lecture, Subbarao did mention that any inflation level beyond the 4-6 percent threshold would demand monetary tightening.

Be that as it may, the overwhelming imperative of pushing a flagging economy - with the last GDP growth figure coming in at only 4.5 percent for the third quarter of FY13 - and the FM’s aggressive moves to keep expenditure and the twin deficits under check, will likely determine RBI’s action this time round.

For an economy desperately in need of adrenalin, this could be welcome news.