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New Delhi: After a
series of big-ticket reforms announced by the government, the
Reserve Bank of India (RBI) is likely to surprise the markets
Monday with some easing in policy rates, even though inflation
remains stubbornly high.
While some analysts say the central bank was not in a position to
cut rates given the recent spike in inflation, majority of them
feel the government might force the RBI to act for the sake of
growth.
"We are not expecting any big rate cuts. But there might be some
surprise," Anis Chakravarty, senior director, Deloitte in India,
told IANS.
Chakravarty said inflation is likely to rise further due to recent
hike in diesel prices, which will have cascading effects on the
economy.
India's core inflation, based on wholesale prices, soared to 7.55
percent in August as compared to 6.87 percent in the previous
month. The RBI considers a 4-5 percent inflation level
comfortable.
In a major step forward towards rationalising subsidies on
petroleum products, the government last week announced the
sharpest ever Rs.5 a litre or nearly 12 percent increase in diesel
price. The move is aimed at controlling galloping fiscal deficit
and stave off ratings downgrade.
Diesel prices have a huge cascading effect and it is likely to put
further pressure on inflation in the coming months.
"In the short-term, inflation is going to go up because of diesel
price hike," Sanjeev Krishan, executive director at
PricewaterhouseCoopers (PwC) told IANS.
Krishan said the RBI is likely to maintain a status quo Monday and
might start cutting rates in the next policy review.
In the first quarter review of monetary policy announced July 31,
the central bank had kept the repo rate, the rate at which it
lends to commercial banks, unchanged at 8 percent. The reverse
repo rate, the rate at which the apex bank borrows money from
commercial banks, was also kept unchanged at 7 percent.
However, the RBI had cut the statutory liquidity ratio (SLR) by a
percentage point to 23 percent to ease the flow of credit to
industry.
"Liquidity is not a concern at the moment, so RBI is unlikely to
cut SLR," said Deloitte official .
The RBI has cut policy rates just once since the beginning of
2010. The central bank eased monetary policy and cut lending and
reverse lending rates by 50 basis points in April, after hiking it
13 times in two years.
Despite stubbornly high inflation, India Inc has been pressing on
the central bank to cut rates, in order to stimulate business
activities and revive economic growth.
R.V. Kanoria, president, Federation of Indian Chambers of Commerce
and Industry (FICCI), said the RBI must complement government's
efforts in improving business sentiments and reviving growth.
Sending a strong signal to push forward the reform process, Prime
Minister Manmohan Sigh's government last week announced that it
would allow up to 51 percent foreign direct investments in
multi-brand retail, 49 percent FDI in aviation sector and also
eased policy to attract overseas money in single brand retail.
"RBI should appreciate the intent of the government in putting its
fiscal house in order and perhaps complement its efforts in
stimulating investment and consequently employment by making
private borrowings from the banking system cheaper," said Kanoria.
According to the latest Central Statistical Organisation (CSO)
data Indian economy grew at a sluggish 5.5 percent in April-June
2012 period as compared to 8 percent in the corresponding quarter
of previous year.
In fact, industrial production has declined. Factory output,
measured in terms of the Index of Industrial Production (IIP)
declined by 0.1 percent in April-July 2012 period, according to
official data released last week.
"While monetary intervention in the form of repo rate cut has been
due for a while, the economy is in need of sentiment boosters,"
said Chandrajit Banerjee, director general, Confederation of
Indian Industry (CII).
(Gyanendra Kumar Keshri can be contacted at gyanendra.k@ians.in)
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