RBI cautious now, 0.25 per cent rate cut likely in September: Rangarajan
Chennai: Stating that RBI has adopted a cautious approach in keeping rates unchanged, former Governor C Rangarajan said the central bank may cut rate by 0.25 basis points by next month if monsoon turns out to be good. Rangarajan, also a former chairman of the Prime Minister's Economic Advisory Council C Rangarajan, said RBI might have been "hesitant" in making any policy changes in the midst of the monsoon. "The RBI has taken a cautious approach. The monsoon picture is still not clear. If the monsoon picks up and there is a clear picture, then there may be a time at which the central bank may want to make any change in the policy rate. That will depend upon how the monsoon behaves," said Rangarajan.
"If the monsoon turns out to be reasonably good, then we can expect some change in the policy rate", he added. "Going ahead if monsoon turns out to be good which would be understood in two months time, then a 0.25 per cent rate cut is possible by the end of September," he said. RBI, which today kept its benchmark interest rate unchanged at 7.25 per cent, has cut rates thrice so far in 2015, by 25 basis points each. Stating that the general inflation was showing a tendency to decline, he said this was further helped by a substantial reduction in crude oil prices.
"Even in the case of retail inflation with respect to the transport, the inflation rates are extremely low. The full impact of the decline in crude oil prices and the petroleum products will be felt in the coming months," he said. He said if the monsoon turns to be reasonably good, then food inflation may not become much of a problem. "Taking these two facts together one can expect a decline in inflation happening. If that happens, perhaps the policy rate could also change," he said.
He said RBI would be 'hesitant' to make any policy changes in the midst of monsoon period. "I feel if things move in the right direction, one can expect a reduction in policy rate may be at the end of two months," he said. "Since crude oil price is declining and if food inflation moderates on the back of good monsoon there would be room for rate cut (in September)," Rangarajan said. After strong rainfall in June, July has been below par, but on net, the monsoon is near normal so far.
The Met department has said that the rainfall over the country as a whole during the second half of the season (August to September) is likely to be 84 per cent of LPA (long period average) with a model error of plus or minus 8 per cent suggesting it could be deficient. The RBI will come out with its fourth bi-monthly policy for this fiscal on September 29.
