With latest macro-economic data showing inflation at a record low and fall in factory output, the Reserve Bank of India (RBI) is expected to reduce its repo, or short-term lending rate, at its monetary policy review later today.
At its second bi-monthly monetary policy review of the fiscal on 7 June, the RBI maintained status quo on its short-term lending rate to commercial banks at 6.25 percent. In doing so, the policy statement said the six-member Monetary Policy Committee (MPC) was guided by the risks to inflation.
Meanwhile, the central bank is facing increased pressure from both the industry and the government to cut rates as they think that is the only way to boost the sagging private investment in the country.
Here are the key points to know before the RBI monetary policy committee's decision later in the day:
1) The data that matter: Retail inflation in India during June dropped to a record low of 1.54 percent, while industrial production data showed that the growth in factory production fell to 1.7 percent in May, from 8 percent in the same month a year ago. Food inflation in June stood at (-)2.12 percent as against a two-year peak of 8.35 percent in July 2016. However, core inflation, which remained above 4 percent for many years, has seen a softening trend of late. According to Kotak Bank, the metric slipped to a record low of 3.73 percent in June, down from 4.13 percent in May. "Excluding petrol, diesel and gold and silver, refined core index, a metrics of real underlying price pressures, also remained flat compared to 0.3% in May," it said.
2) Pressure from government: After the numbers came out, the government's pressure on the central bank to lower rates has heightened. “Clearly, this low number (CPI) and what it implies about underlying price pressures—as well as the latest Index of Industrial Production (IIP) data just released—is something that, I am sure, all policymakers will reflect upon very, very carefully,” Subramanian said in a statement. Though there is no mention of the RBI anywhere, it is definitely aimed at the central bank.
3) Expectations from industry: Meanwhile, industry lobby groups are also building pressure. Industry chamber Assocham on Sunday urged the apex bank to cut interest rates. "Citing inflation at a five-year low and deceleration in the factory output, the Assocham has written to RBI Governor Urjit Patel, making out a strong case for at least 25 basis point cut in the policy interest rate when the RBI Monetary Policy Committee meets on August 2," an Associated Chambers of Commerce and Industry of India statement said. The chamber noted that the wholesale price index (WPI) also eased to 0.9 percent from 2.17 percent.
4) All bet on 25 bps cut: Most of the economists expect the RBI to cut rate by 25 basis points. "All considered, we continue to expect a 25 bps (basis points) rate cut in the August 2 meeting. We expect the central bank to maintain its neutral stance, which we believe is consistent with moderate rate cuts.... We've said this before, and we have found new evidence since India may have already become a 4 per cent inflation economy," HSBC said in a research note. Kotak Bank also expects the RBI to cut rate by 25 bps. "RBI had revised down its inflation trajectory sharply in the June policy. MPC was keen to watch for sustenance of the downward momentum for the next couple of prints before deciding on the next policy action. Given that inflation reading has further surprised with sub-2% print (well below RBI’s own estimates), we find some room for RBI to be accommodative. We expect the MPC to cut repo rate by 25 bps in the August meeting," the bank said in a recent research note. In a Reuters poll, 40 of the 56 economists polled predicted a repo rate cut by 25 basis points to 6 percent, the lowest since November 2010.
5) But read the comments closely: However, most of the experts do not expect the central bank to continue with the accommodative stance. "We reckon that the room for further monetary accommodation remains limited amid (1) mean reversion of food prices, (2) rising real rural wages, (3) onset of global financial tightening and (4) adverse base effect," Kotak said in the note. It has to be remembered prices of some of the vegetables, such as tomatoes, are already rising due to climate disruptions. Though rains are considered to be in surplus overall as of now, it remains to be seen whether the spread is conducive for good crop of key commodities. HDFC Bank feels the RBI will take good care to avoid the cut being seen as a shift in its stance. "Thus the communication in the policy will give the impression of a somewhat ‘reluctant rate’ cut replete with caveats and riders," it said. The bank said the next few months are likely to be event heavy both from the domestic and global perspective. "G-7 central banks may start tapering their balance sheets, the US Fed could hike the policy rate and the full extent of the farm loan waiver and its funding will reveal itself. Once the dust settles, there could be room for another rate cut in 4Q FY18. It’s honestly too early to tell," it said.
So, watch out for the MPC's comment. It is as important as the rate cut itself.
With inputs from IANS
Updated Date: Aug 02, 2017 11:17 AM