The sliding prices of commodities from crude oil to tomatoes along with the still-uncertain economic revival, slowing loan demand and improving governance may all possibly add up to forcing RBI Governor, Mr Raghuram Rajan to begin easing the interest rate cycle earlier than expected.
That said, the December policy may get more dovish with September GDP growth likely to slip to about 5% from 5.7% in June. From that it seems like it is more likely that the cut is in February.
Pressure is mounting on Mr. Rajan, who seems to have acquired a reputation as an inflation warrior ever since he has taken charge. He’s been relentless in his bid to tame prices, making inflation-targeting the main objective of the monetary policy. While this has won him admirers in the international investor community and elsewhere, growth-hungry companies believe he is out of sync with reality. Five of the seven members of the Technical Advisory Committee have sought an interest rate cut during its September meeting, RBI said in a statement on the minutes of the meeting.
On further probing the general belief at TAC is that since Indian aggregate demand remains weak, and output is much below potential, the glide rates should be kept to the minimum consistent with anchoring inflation expectations. This statement came from Mr. Goyal, a member of RBI’s Technical Advisory Committee (TAC).
“Currently, interest rates are a disincentive,” Arun Jaitley claimed in a recent interview. “Now that inflation seems to be stabilising somewhat, the time seems to have come to moderate the interest rates.” Furthermore, the political class may also be getting impatient with the government having tightened up administration.
“Given the consistent language that RBI has used in previous policies, it is likely that they will wait a few months more before any rate cut, and await comfort that the current positive trends on inflation can sustain into January 2016 and beyond,” said Ananth Narayan, regional head of financial markets, South Asia, at Standard Chartered Bank. As a precursor to the easing cycle, even if Mr. Rajan does not lower interest rates, his language may become a lot more dovish, unlike his hawkish stance all along. “We still expect Mr. Rajan to cut in February to await greater clarity about meeting the 6% January 2016 target,” said Mr. Indranil Sengupta, economist at Bank of America Merrill Lynch.
Retail inflation dropped to a low of 6.46% in September, below the 8% target for January 2015, and closer to January 2016′s target of 6%. But the catch is that once the base effect fades, the measure is expected to accelerate again by early next year. In fact, the RBI model forecasts 7% retail inflation by March 2016, which may be revised lower if commodity prices keep falling.
This has prompted some in the government, which under Narendra Modi has been relatively non-interventionist unlike the previous one, to begin talking up the advantages of an interest rate cut.
