India Inc. betting that Rajan will cut rates

Reserve Bank of India Governor Raghuram Rajan believes in taking more than a look-see. He thinks interest rate cuts should be applied only when inflation is consistently low.

So after the latest report on fall in inflation to minus 4.95% in August, what is he going to do on Sept. 29 when the bank holds its policy review meeting?

Amid pressure from India Inc. to revive confidence of domestic investors and consumer demand and slow GDP growth, Asia Unhedged believes that Rajan will have no hesitation in delivering interest cuts.

With global economy not in good shape, India has to focus on these two factors to accelerate growth.

The central government too is pressuring Rajan to cut rates. Some experts are calling for a cut of 50 basis points.

Credit rating agency India Ratings and Research (Ind-Ra) says RBI will consider slashing repo rate by 0.25% in its upcoming policy meeting, irrespective of a rate hike by US Federal Reserve.

“Ind-Ra’s base case expectation is a 25bps (0.25%) repo rate cut on Sept. 29, 2015. Ind-Ra believes the Reserve Bank of India (RBI) will consider reducing policy rates this month, irrespective of the Fed hike,” the ratings and research firm said in a report Monday.

Given the low inflation and attractive real interest rates in the economy, RBI has an elbow room to cut rates aggressively,” it said.

While it is up to the RBI governor to take the call, one has to admit that his tight rein on inflation had saved the Modi government from an embarrassment as inflation figures were running in double digits earlier.

However, the rapid fall in prices has raised fears that India is heading towards deflation.

Arvind Subramanian, Modi’s chief economic adviser, had warned of looming deflation early this month and sought steps to boost consumer demand and investment.

A laborer load bags of pulses in a supply vehicle at a wholesale grain market in Ahmedabad

A laborer loads bags of pulses in a supply vehicle at a wholesale grain market in Ahmedabad

But Rajan is worried about a possible price rise. Although prices of vegetables like potato have fallen, price of onion is racing up.

Onion being the staple food of millions of Indian consumers, any major price rise in that commodity will upset consumers and turn them against the government.

Deflation is of far more concern than inflation for this could lead to a cycle of lower spending and lower demand resulting in slow growth.



Categories: Asia Unhedged, South Asia

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