Mumbai: India's central bank is expected to cut interest rates for a third time in five months when it meets this week, confident that inflation is stable enough to weather the summer monsoon.
The Reserve Bank of India (RBI) has already lowered its benchmark repo rate, the level at which it lends to commercial banks, by 50 basis points to 7.5 per cent this year. And analysts believe the RBI will snip rates again at its next meeting on Tuesday in a bid to encourage greater lending to businesses and increased consumer spending, stimulating the economy.
"I expect the RBI to cut the rate by 25 basis points," said Ashutosh Datar, an economist at IIFL Institutional Equities. Rupa Rege Nitsure, chief economist at L&T Financial Services, agreed, saying she believed the Mumbai-based bank would opt for a "modest" cut. "Given the uncertainty concerning oil prices and the depreciation in the rupee, which have a high inflationary potential, I don't think many people are expecting a 50-point cut," added Rupa Rege.
The RBI, led by governor Raghuram Rajan, sliced 25 basis points off the repo rate in January, the first reduction in 20 months, before a surprise repeat cut in March. It kept the key rate unchanged last month, citing inflation concerns and a failure of most commercial banks to pass on lower borrowing costs to customers in Asia's third-largest economy. But Nitsure said 20 banks were now heeding Rajan's call to reduce their base rate and another cut would motivate others to "follow suit".
"There is a need for borrowing costs to come down because demand is so low and inflation is not a threat," she said. Prime Minister Narendra Modi's right-wing government swept to power last year pledging to reform and revive a flagging economy. It received a major boost on Friday when data showed that India's economy grew 7.5 percent in the first three months of the year, overtaking China. The government would like the RBI to cut rates further but Rajan has so far made controlling inflation a priority, setting a target of bringing it consistently below six percent by January next year.
In April, consumer inflation fell to a four-month low of 4.87 per cent, well within the RBI's target range. Last week India's top economic advisor suggested that had "implications for interest rates". Arvind Subramanian added that food stocks were plentiful enough to help contain inflation even if the three-month monsoon, expected imminently, is weakened by the El Nino weather phenomenon as forecast. Monsoon rains are vital for Indian crops and a particularly dry season can reduce farm output, raising food prices which can be crippling for the tens of millions of India's poor. "It is possible to contain (inflation) going forward even if the monsoon is not going to be as good," Subramanian added.
Datar, the economist, said the current retail inflation level "gives the RBI enough headroom to be able to cut rates to try to stimulate demand". He added that "if monsoon inflation is not as bad as feared then they'll probably cut them again later in the year". Not all experts agreed that a cut this week would be the right way to go though. Arun Singh, senior economist at Dun & Bradstreet said,’ The monsoon's inflationary "risk" meant the RBI should wait until it had passed.
