Speculation differs on outcome Tuesday.
R. Chandrasekaran
CHENNAI: The Reserve Bank of India is meeting on Tuesday to take stock of the mid-quarter review of monetary policy. Will the central bank cut interest rates as has been demanded by the government and the captains of industry to stimulate growth?
Opinion from experts differs on the likely outcome of the meeting. While a section of experts expects 25 basis points cut in interest rates, the other section sees the RBI leaving the rates unchanged. Both the sections of experts have their own reasons for such an opinion.
For instance, an analyst from Morgan Stanley do not expect the central bank to cut interest rates as the consumer price index or CPI remain high thus leading to an elevated and sticky inflation estimations though consumer prices could soften in the coming months. The investment banker believes CPI is much more important than the wholesale price index or WPI, which witnesses softening trend.
The higher CPI will also mean lower deposit growth. This could also likely lead to increased imports of gold, which the government is not favored. Therefore, till the inflation moderates at the consumer level, there is less chances of a cut in interest rates.
On top of this, the RBI Governor D. Subba Rao is also voicing his concern over the fiscal deficit and has been airing difficulties in reducing interest rates. Interestingly, the government’s plan to mop up resources from the auction of spectrum also failed to generate the kind of response it would have liked it to be.
It was this that investors are also concerned about and their reactions were seen in the last week’s trading and on Monday’s trading, in which the Bombay Stock Exchange’s benchmark index shed 134.36 points or 0.69 percent.
However, the former RBI Governor and a member of the prime minister’s economic advisory committee, Dr. C. Rangarajan believes that while February headline inflation rose modestly to 6.84%, a fall in core inflation should help the central to slash interest rates. He is one of the economists, who sees higher growth and believes that the Indian economy could rebound to 6-6.5% in the next fiscal year ending March 2014.
Another analyst, Taher Badshah from Motilal Oswal AMC has reportedly said he expects 25 basis points reduction in repo rates. He also sees a strengthening US economy and increasing appetite for risk assets besides currency would reflect favorably on emerging economies including India.
Meanwhile, India Ratings believes that the worst is over for Indian economy though uncertainty remains globally. Therefore, quantitative fiscal reforms are the need of the hour to stave off any bad news. The RBI Governor sees more growth opportunities for India and believes the current government’s expectation is below the potential. Therefore it is this feeling that gives some hope of a cut in interest rates. While a 25 basis points reduction will be in line with expectations, anything to the contrary will be upbeat or downbeat.