India Inc has been asking the Reserve Bank of India (RBI) to cut key interest rates to pump up consumption and fuel growth. However, with the latest retail inflation figure climbing to 5% from 4,38% month on month, Raghuram Rajan, the RBI chief, has every reason to wait and watch what the Finance Minister Arun Jaitley announces in the budget in February.
India Inc has been asking the Reserve Bank of India (RBI) to cut key interest rates to pump up consumption and fuel growth. However, with the latest retail inflation figure climbing to 5% from 4,38% month on month, Raghuram Rajan, the RBI chief, has every reason to wait and watch what the Finance Minister Arun Jaitley announces in the budget in February.
HDFC Securities, in a note dated January 13, 2015, said, "The December Retail inflation came in at 5.0%. Though this was way higher than the November reading of 4.4%, it was a tad lower than expectations of 5.2%. This has given hopes that the Reserve Bank of India (RBI) could slash rates. However, the Mint Street is unlikely to oblige."
Even though RBI has some space to cut rates as the rupee has gained value over the past month, it is likely to hold the fort and not give in to the pressure of India Inc.
Dhananjay Sinha and Nikhil Gupta of Emkay Global, too, echoed similar sentiments. They said, "Although IIP reversed its October fall, the growth remains subdued in the first eight months of FY15. Further, inflation continues to
remain low. Although this combination will raise the pressure on the RBI to cut policy rates; we believe that rate cut should be resisted next month."
Dalal Street is expected to post slow growth for the third quarter results which could increase the pressure on the RBI to cut rates to boost growth.
Care Ratings, however, argued that the RBI should cut rates early February. It said that the inflation remains under the comfort zone of the RBI and this gives the Bank room to cut rates. Care Ratings said, "We expect the RBI to cut the policy repo rate by at least 25 basis points in the next policy review to be held in early February 2015."
Pranjul Bhandari and James Pomeroy of HSBC Global Research, in their report dated January 12, 2015 said that the factory output increase was primarily due to Diwali and the growth momentum was still weak. They said, "Both inflation and growth data reinforce the case for monetary easing this year. We expect 50 basis points in rate cuts in 2015."
However, the rise in retail inflation from 4.38% to 5% on a month on month basis show that the retail inflation will probably settle at a a higher number. Rajan had also said in December 2014 that even though a policy shift was likely in early 2015, it will depend on the fiscal and inflation numbers.
With the RBI categorically waiting for clear trends in inflation, its decision in February is anybody's guess.
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