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NEW DELHI, 7 Nov, 2014: The industry is clamouring for a rate cut from the Reserve Bank of India (RBI). India Inc believes that RBI Governor RaghuramRajan should soften his anti-inflationary hawkish stance, to support Modi government's growth efforts. Banks have also been cutting rates, with Axis Bank reducing its lending rate recently. Banks, led by SBI, have been cutting term deposit rates amid signs of weak credit growth.
But, is the time ripe for the central bank to cut rates? And, will that rate cut necessarily spur investments? Yes, feel most economists and analysts.
Indranil Sengupta, Economist at Bank of America Merrill Lynch told Economictimes.com that cutting lending rates is key to economic recovery. "The last upcycle was driven by higher capital expenditure. That itself was made possible by sustained monetary easing by the then Governor, Bimal Jalan," said Sengupta.
Vinay Khattar, Head of Research at Edelweiss is of the opinion that, "The cost of capital is an extremely important parameter for investments in an economy. "Previously, the Indian situation was complicated due to policy logjam. With that situation beginning to improve, an RBI rate cut would definitely help investments," Khattar told Economictimes.com.
In September, the WPI inflation plunged to a five-year low of 2.38% and CPI inflation fell to 6.46%, its lowest level since the index was introduced in January 2012. However, Raghuram Rajan in his last monetary policy review said, "Future food prices and the timing and magnitude of held back administered price revisions impart some uncertainty to an otherwise improving inflation outlook, where lower oil prices, a relatively stable currency, and a negative output gap continue to put downward pressure." "Base effects will also temper inflation in the next few months only to reverse towards the end of the year.
The Reserve Bank will look through base effects," he had said.
Rajan also cautioned that while the RBI's target of 8% CPI inflation by January 2015 was likely to be met, the medium-term objective of 6% CPI by January 2016 may be difficult to meet. "The balance of risks is still to the upside, though somewhat lower than in the last policy statement. This continues to warrant policy preparedness to contain pressures if the risks materialise.
Therefore, the future policy stance will be influenced by the Reserve Bank's projections of inflation relative to the medium term objective (6 per cent by January 2016), while being contingent on incoming data," Rajan had said.
Meanwhile, industry is not yet out of the woods, with August IIP disappointing at a meagre 0.4%. Even as RBI remains cautious on the inflation trajectory, economists and experts are of the view that benign global factors, particularly falling crude oil prices offer room for the central bank to signal a rate cut.
Says Mythili Bhusnurmath, Consulting Editor of ET Now, "While there is no one-to-one relation between rate cut and investment pick-up, it does play a crucial role." "The RBI should at least signal a rate cut, because banks have already started cutting rates. After all, it is important for the central bank not to sound redundant. The markets have already signalled a rate cut, so should the RBI if only to help at the margin," Mythili told Economictimes.com.
"I think the RBI should take a dovish stance. Inflation is definitely coming down, if not because of the the government or RBI's efforts, but owing to dipping global crude oil prices. If the Governor does not want to cut rates in the December review, he should certainly signal willingness to do so and then maybe cut rates in February," Mythili added.
According to Khattar, the inflation trajectory is down, food prices have started softening and oil has fallen drastically. "What could be holding RBI though is the apprehension that with demand pick up, inflation may go up. Also the prospect of a US Fed rate hike, which in turn will lead to capital outflow may be adding to RBI's reluctance to cut rates," he said.