ADVERTISEMENT
ADVERTISEMENT

Time for dovish stance

Time for dovish stance
Highlights

The debate has already begun well before the Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel is scheduled to meet on August 2 to decide the course of monetary policy for the next few months. 

The debate has already begun well before the Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel is scheduled to meet on August 2 to decide the course of monetary policy for the next few months.

The crux of the debate is whether the reticent Urjit Patel who stumped many an observer by playing a great inflation hawk and keeping key interest rates unchanged for good eight months will turn a dove and bless India Inc with a rate cut of at least 25 basis points. At present, the key lending (repo) rate stands at 6.25 per cent.

This debate will obviously reach feverish levels as the D-Day nears and it’s very likely that odds will favour a cut, however small or big it may be. In June, retail inflation based on Consumer Price Index (CPI) nosedived to a five-year low of 1.54 per cent due to cheaper vegetables and pulses.

The inflation reading stood at 2.18 per cent in May and was at a high of 5.77 per cent a year ago. Wholesale inflation was also down to 0.9 per cent, an 11-month low, in June against 2.17 per cent in May this year.

For an inflation hawk like Patel, these low inflation numbers present a good opportunity to go for a rate cut as many people including Finance Minister Arun Jaitley are of the strong view that Indian economy needs a boost at this juncture and there is no better booster shot than an interest rate cut that makes bank finance cheaper. India Inc has also been waiting for a dovish RBI stance for a long time and it didn’t hide its displeasure every time RBI stuck to status quo in the last eight months.

Of course, there is considerable weight in India Inc’s arguments. While the inflation is down to historic low levels, the Index of Industrial Production (IIP) or factory output, a significant indicator of the economic activity in the country, doesn’t present a healthy picture.

The factory output witnessed a measly 1.7 per cent upswing in May this year, dragged down by dip in mining and manufacturing activities. It recorded eight per cent growth a year ago. The discouraging IIP numbers and encouraging inflation readings obviously warrant a positive decision from the apex bank to spur economic growth.

However, there was also a view when RBI stuck to its guns last time that the apex bank was looking to assess impact of the GST rollout on economy and inflation before reducing rates. The new indirect tax regime came into play on July 1 and the rollout has more or less been smooth.

Therefore, GST is unlikely to play spoilsport.So, odds are in favour of RBI lowering key rates at its next meeting. However, the question is whether RBI Governor and his MPC colleagues will take the bait or administer the bitter pill yet again. But the problem is stock markets already factored in a rate cut in their historic bull run. So, a status quo will send them into a tailspin!

Show Full Article
Download The Hans India Android App or iOS App for the Latest update on your phone.
Subscribed Failed...
Subscribed Successfully...
More Stories


Top