In the run up to the third bi-monthly monetary policy on August 4, RBI governor Raghuram Rajan has repeatedly said that the central bank will track inflation and monsoon to take a stance on rate cuts.
Reserve Bank of India has been generous with rate cuts this year, with three downward revisions since January already.
In the run up to the third bi-monthly monetary policy on August 4, RBI governor Raghuram Rajan has repeatedly said that the central bank will track inflation and monsoon to take a stance on rate cuts.
The domestic scenario which let the central bank governor cut rates so far, has changed now.
Here's what the scenario was till June 2, when RBI cut rates the last time:
– Moderation in composite purchasing managers’ indices (PMI), economic sentiment and consumer confidence in April.
– India's Industrial production was recovering, albeit unevenly.
– The sustained revival of coal output augured well for electricity generation and mining and quarrying, going forward. There was some optimism on gas pricing and availability.
– In April, retail inflation measured by the consumer price index (CPI) decelerated for the second month in a row, supported by favourable base effects (of about - 0.8%) that moderated the rise in the price index for the fourth successive month.
– Food inflation softened to a contra-seasonal four-month low, with the impact of unseasonal rains yet to show up. Vegetables inflation continued to ease, along with that of other sub-groups such as cereals, oil, sugar and spices. On the other hand, protein items, especially milk and pulses, continued to impart upward inflationary pressures.
Despite some discerning factors about consistent growth in the country, the aforementioned factors let RBI cut key policy rates. RBI cut repo rate by 25 basis points from 7.5% to 7.25%. The cash reserve ratio, which is the amount of deposits cashed with the RBI, was kept unchanged at 4%.
Since then,
– WPI has remained negative for the eight straight month, slipping further to -2.4% on cheaper vegetable and fuel prices
– Although the prices of various kitchen items eased, pulses and onion turned dearer in June, as per the Wholesale Price Index (WPI) data released by the government today.
– CPI, the index that RBI tracks for monetary policy, has indicated that retail inflation has edged up to a eight-month high of 5.4% in June.
– Monsoon, which remained elusive for most of June-July, has kick-started again, but the country is still witnessing deficit rainfall this year, adding worries to lower crop output and pressure on vegetable prices in the short term.
– RBI has cut rates by a cumulative 75 bps since January 2015; however, banks, on an average, have reduced their base rates by 25 bps and deposit rates by 50 bps only, a report from India Ratings said.
– Credit growth has also slipped below 10% from the medium-term average of 21%, limiting the transmission of RBI rate cuts into lending rate cuts so far.
CPI at eight month highs, deficit monsoon and inadequate lending rate cuts by banks is going to keep the likelyhood of RBI cutting rates in the third bi-monthly policy meet on August 4, minimal.
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 "RBI governor Raghuram Rajan")
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