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Inflation-focused RBI may not oblige rate cut

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The Reserve Bank of India (RBI) is unlikely to cut key policy rates on December 2, when it unveils its monetary policy though the clamour for rate cuts is growing louder, both from the industry and the finance ministry.

Despite mounting pressure, RBI governor Raghuram Rajan is expected to keep rates unchanged till the time the price pressures are completely off. According to bankers and economists, the likely status quo by RBI is mainly to ensure that commodity prices do not rebound and the 6 % consumer price inflation by Januray 2016 is achieved.

However, the Finance Minister Arun Jaitley in recent times has publicly said that rate cuts are crucial for the economy to rebound since the growth is stagnating.

On the other hand, Raghuram Rajan has consistently argued that high inflation and high growth cannot go hand in hand. The fall in commodity prices particularly oil prices, which comprise 30% of the weightage in the CPI basket, has aided fall in retail inflation. But the fall in commodity prices are elusive and RBI needs to stay its course to tame inflation.

Pranjul Bhandari, chief economist HSBC, said, "If the RBI is able to hold on to rates at this crucial juncture, it should get a clearer sense of whether the current softening in commodity prices is likely to persist. It should also allow some more time for the recent fall in prices to feed into inflation expectations. These factors are critical if the RBI wants to meet its target of 6% CPI inflation by January 2016, and more importantly, remove excess inflation that has plagued the economy."

Ever since the sharp decline in CPI inflation to 5.5% in October from an average of 8% in the first half of the year, industry has been beating its brows asking for a rate cut. Food inflation has been steadily coming down despite a drought this year, with the government managing the supply of food and oil prices which are down 30% over the previous year, continuing to soften inflation to the extent of its weightage in the CPI basket and having a benign impact on the input cost of firms.

But the RBI knows oil prices are easily reversible and food inflation is prone to spikes, especially fruits and vegetables, whose demand supply dynamics are harder to smoothen. RBI is also factoring in the impact of Federal Reserve's exit from the loose monetary policy, which could potentially reverse the foreign institutional flows from India.

A senior banker said,"Unless the reform process is underway companies will not invest. Despite the buoyancy in the equity market there is no capex investment or even brown field expansions. Industry is waiting for a clarity on policy issue. For companies the interest component is not an all abiding factor if they are certain about running their business without interruption."

Soumya Kanti Ghosh, chief economic advisor, SBI, said," We believe the time is not yet ripe for a rate easing cycle and December 2 will not see any rate easing from RBI."

However, with inflation consistently undershooting and bank deposits and credit growth falling in Q2, RBI is taking a look if the cooling is well entrenched in the economy and will not reverse. The monetary easing by ECB (European Central Bank) would see capital flows into India, which is also prompting the RBI to hold its guard.

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