Mumbai: Reserve Bank of India Governor Duvvuri Subbarao is expected to go slow on his over two-year-old anti-inflationary posture and go with the common mood by unveiling a softer interest rate regime on Monday, as more and more dark clouds gather over the economy, though the price index still remains above RBI's comfort zone.
Following the shocking latest GDP numbers, which showed that economic expansion had hit a nine-year low at 6.5 per cent in FY12, there have been incessant calls from the government as well as economists to give growth concerns a priority, rather than the inflation.
Last Saturday, Finance Minister Pranab Mukherjee had expressed confidence that Reserve Bank will "adjust the monetary policy". "I am confident the RBI will adjust the monetary policy, as we are adjusting fiscal policy (to prop up the economy)," Mukherjee said at an industry event in Mumbai.
The RBI Governor will unveil the mid-quarter review of monetary policy on Monday, wherein, it is expected, he will bring down the key short-term lending rate or repo rate by at least 0.25 percentage point to 7.75 per cent, and may even lower the cash reserves ratio by up to 1 percentage point.
So far this year the Governor has reduced CRR by a hefty 125 bps and the repo rare by a more than expected 50 bps as the core inflation began to ease and growth began to dodder. This was a radical departure from his 20-month rate-hike cycle beginning March 2010 wherein he had ratcheted up lending rates by a whopping 375 bps.
But headline inflation is not giving the Governor any comfort at present, as it rose to 7.55 per cent in May. Yet, the IIP numbers released last week strengthened the call for rate cuts as the April factory output data was barely in the green zone at a paltry 0.1 per cent.
The steep contraction in exports, which in May fell by over 3 per cent and the steep plunge of the rupee also make a case for easing of rates. Chief Economic Adviser Kaushik Basu and Planning Commission head Montek Singh Ahluwalia have called for pro-growth and out-of-the-box measures from the RBI.
A crucial development would be today's Greece reelection, which will decide whether the country will remain in Eurozone.
Last month's polls threw out the pro-Euro parties in a hung verdict. If Greece exits Euro, it will put the Eurozone into a deeper crisis, and would threaten the global economy too. So RBI would be watching the outcome of the polls.
The Central Bank is also worried about the widening subsidy bill which is kicking up price pressure on the economy as well as the deteriorating government finances and the resultant market borrowing.
Another worry is the widening current account deficit, set to top 4 per cent in FY12 from 2.7 per cent in FY11. Number of agencies have also called for rate cuts and expect at least 25 bps reduction in the repo rate. Morgan Stanley and Barclays expect RBI to cut repo by 25 bps, but Dun & Bradstreet and HSBC have said the cut will not be sufficient to arrest downturn.
"Considering that core WPI inflation is steady and GDP growth has been slowing, we think there is high chance that RBI will cut the repo rate by 25 bps," Morgan Stanley said. "A good monsoon will remain crucial in the RBI's policy calibrations, as it will have implications for both inflation and growth. In particular, headline inflation remains an issue....Given it is coming with a softening core, it is not a major stumbling block to further RBI rate cuts....we now expect RBI to reduce rates by 25 bps," a Barclays report said.
According to HSBC, RBI may, "feel compelled" to pull the trigger and cut rates again on Monday but that would be a wrong medicine; instead, a heavy dose of structural reform is needed. "Teasing up demand would only risk generating more inflation," an HSBC report said.
But some experts, including Kotak Bank Chief Economist Inranil Pan, have called for continuing with the current rates as inflation is a bigger danger than doddering growth.
SBI chairman Pratip Chaudhuri is hoping for a massive 100 bps cut in the CRR, so as to ease the tight liquidity condition in the system.
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