Mumbai: With the RBI expected to announce its credit policy on August 9, it is interesting to note that the US Fed, the Bank of Japan and the European Central Bank and the Bank of England have all left their rates unchanged indicating the persisting weaknesses in growth in developed economies.
Noting this, Care’s chief economist Madan Sabnavis said there are still no clear signs of a recovery in the developed world with the USA being possibly the only exception, though the pace of growth will be moderate in the upward direction.
In the case of the Bank of Japan he says “that it has gone slow does indicate that there is now recognition that monetary policy has its limitations in terms of reviving the economy.”
The environment in India is currently benign for the RBI governor to reduce interest rates — oil prices are down between $42-45 a barrel, a good monsoon so food prices could moderate, enough production capacity etc.
However as Pradip Shah of IndiaAsia Fund Advisors says, Raghuram Rajan will have to recognise that monetary policy cannot control food prices or all inflationary constituents, then only will he bring down rates. “Food inflation is really imported inflation as we imported 5 million tonnes of pulses or 20 per cent of our total demand which has resulted in May consumer price index being high. So it is the civil supplies departments of the state governments who have to facilitate distribution and dealer to dealer business that dictates food prices.”
Mr Shah says “if Mr Rajan cuts rates, borrowing will increase and consumer demand will get a boost which will spur demand. The manufacturing sector has a significant idle capacity that will be utilised,” he added making a strong case for a rate cut.
