After a series of big-ticket reforms announced by the government, the Reserve Bank of India (RBI) is likely to surprise the markets on Monday with some easing in policy rates, even though inflation remains stubbornly high.
While some analysts say the central bank was not in a position to cut rates given the recent spike in inflation, a majority of them feel the government might force the RBI to act for the sake of growth.
“We are not expecting any big rate cuts. But there might be some surprise,” Anis Chakravarty, senior director, Deloitte in India, told IANS. Chakravarty said inflation is likely to rise further due to recent hike in diesel prices, which will have cascading effects on the economy.
India’s core inflation, based on wholesale prices, soared to 7.55 per cent in August as compared to 6.87 per cent in the previous month. The RBI considers a 4-5 per cent inflation level comfortable. In a major step forward towards rationalising subsidies on petroleum products, the government last week announced the sharpest ever Rs5 a litre or nearly 12 per cent increase in diesel price.
The move is aimed at controlling galloping fiscal deficit and stave off ratings downgrade. Diesel prices have a huge cascading effect and it is likely to put further pressure on inflation in the coming months.
“In the short-term, inflation is going to go up because of diesel price hike,” Sanjeev Krishan, executive director at PricewaterhouseCoopers (PwC) told IANS.
Krishan said the RBI is likely to maintain a status quo on Monday and might start cutting rates in the next policy review. In the first quarter review of monetary policy announced July 31, the central bank had kept the repo rate, the rate at which it lends to commercial banks, unchanged at 8 per cent.
The reverse repo rate, the rate at which the apex bank borrows money from commercial banks, was also kept unchanged at 7 per cent. However, the RBI had cut the statutory liquidity ratio (SLR) by a per centage point to 23 per cent to ease the flow of credit to industry.
“Liquidity is not a concern at the moment, so RBI is unlikely to cut SLR,” said Deloitte official . The RBI has cut policy rates just once since the beginning of 2010. The central bank eased monetary policy and cut lending and reverse lending rates by 50 basis points in April, after hiking it 13 times in two years.
Despite stubbornly high inflation, India Inc has been pressing on the central bank to cut rates, in order to stimulate business activities and revive economic growth. R.V.
Kanoria, president, Federation of Indian Chambers of Commerce and Industry (FICCI), said the RBI must complement government’s efforts in improving business sentiments and reviving growth.