MUMBAI India's falling inflation rate gives the Reserve Bank of India (RBI) room to cut its policy rate to a more than six-year low to help an economy hit by a crackdown on cash.The question is whether the RBI will pull the trigger on Wednesday or wait until April.
In a surprise move earlier in December, the RBI's Monetary Policy Committee (MPC), during its second bi-monthly monetary policy review - the fifth of the fiscal - kept the repurchase rate, or the short-term lending rate it charges on borrowings by commercial banks, unchanged at 6.25 per cent. One basis point is one-hundredth of a percentage point. Another two expected a 50 bps cut.
Kristin Forbes signaled she was inching closer to voting for a rate hike after becoming increasingly "uncomfortable" with surging inflation given the economy's resilience since the Brexit vote. We have cut rates by 2% as compared to the 1.75% cut by RBI.
From an average level of 4.9 per cent in 2015-16, CPI inflation appears poised to moderate to around 4.6 per cent in the current fiscal.
The RBI is not clear as to the money situation in the country.
The chamber said banks should pass on the benefit of lower interest rates on old loans through different means so that the interest burden for companies comes down.
While no respondent expected a cut higher than 25 basis points, there were at least five people who said that the central bank may choose to hold rates in the light of global uncertainties and sticky core inflation.
Banks have also substantially slashed their lending rates this year after receiving a surge in deposits after demonetisation.
"Although the Fed is expected to only gradually raise rates in 2017, pressure on emerging market currencies will remain and we expect the RBI to emphasise this while setting policy", he said.
The finance minister on February 1 reiterated that the government will ensure its fiscal deficit does not exceed 3.2 per cent of the GDP.
Banks are visibly passing on the interest rates aggressively by cutting rates since the beginning of the year i.e. 2017.
Along with other measures like protection of cheap imports, the benefits of the ample liquidity in the banking system must be extended to the firms grappling with the old loan books without much delay, it said.
The MPC could again opt for caution, even as some analysts believe the central bank risks acting too late to aid the economy, with private forecasters generally more pessimistic than the RBI.