Will RBI succumb under pressure to cut rates?

Photo: Live Mint

November 10, 2014: The Reserve Bank of India (RBI) hasn't been obliging the market with a rate cut. In September, when all ingredients were in place for a rate cut, the RBI didn't lower rates and made it clear that it's not going to bite the bullet unless it sees inflation at comfortable levels, especially food inflation. 

The RBI has set consumer price index (CPI) target for January 2015 at 8 per cent and 6 per cent for January 2016. With CPI falling for the past four months and at 6.46 per cent for September, the RBI in its policy announcement on December 2 could cut rates.

The rate cut could be due to the pressure from the government who wants the RBI to ease monetary policy to boost growth. Captains of corporate India too have been vocal that high interest rates are hurting their business and growth. 

Last week, HSBC Services PMI data was disappointing with the data falling on the back of weaker growth in the new business orders. The data fell to 50 in October 2014 from 51.6 in September 2014. A level above 50 shows an expansion.

There are reports that the government will set inflation targets for the RBI. This is bad news if the RBI is dictated by the government, but it would be an appropriate time for the RBI to cut rates for accelerating India's growth engine. Why the RBI would be in a comfortable position to cut rates is because of a sharp fall in global crude oil prices, which was not anticipated a few months back. Global crude oil prices have dropped from $110 per barrel to $82 per barrel last week. Second, gold prices also have lost ground, falling to a four-year low. The fall in commodity prices is a big positive for markets and a stable rupee that is hovering around Rs 60-62 against the dollar augurs level for India, giving the RBI the comfort to consider a rate cut.

Meanwhile, this week the market will keep a close eye on macro-economic data starting with the Index of Industrial Production for September on Wednesday. For August, IIP was at 0.4 per cent. On Wednesday, the government will also announce CPI data for October. The market expects the CPI to surge to 7.15 per cent. For September, CPI was at 6.46. On Friday, the government will announce WPI data for October. The market sees inflation to rise to 3.79 per cent for October, compared to 2.38 per cent for September.

Quarterly results of Tata Steel, BPCL, Cipla, DLF, Hindalco Industries, Tata Motors, BHEL, ONGC, SBI and Sun Pharmaceutical Industries will also be in focus. The week would also see some action in stocks that would move in and out of the MSCI India index. The changes will come on effect on November 25. Some of the stocks like AIA Engineering, CMC, Federal Bank, City Union Bank, Prism Cement, Reliance Capital and Sintex Industries will be included in the MSCI Global Small Cap Index.

Courtesy: Business Today