Friday, 5 December 2014

RBI may ignore Finmin's call for rate cut

Despite a clear preference voiced by finance minister Arun Jaitley for rates cuts, the central bank is unlikely to follow suit.

Fast Facts: Retail inflation for October was below RBI's Jan 2016 target of 6%; this has led industry and economists to call for rate cut.

The union government would like the RBI to cut the interest rates to push economic growth. But bankers are still not convinced that the RBI will resort to a cut despite the fact that wholesale inflation dipped to a five-year low of 1.77% in October and retail inflation is down to 5.5%.
 A few weeks before the RBI was set to announce the monetary policy--RBI governor Raghuram Rajan will announce the central bank's bimonthly review on December 2--finance minister Arun Jaitley has made his preferences clear on cut in interest rates. “Reduction in the cost of capital will give a good fillip to the Indian economy,“ Jaitley said at the Citi Investor Forum, but added that the decision was the RBI's to make.

The retail inflation for October was below RBI's January 2016 target of 6% and this downward trend has triggered a call from industry and some economists to cut rates.

“Inflation, especially food inflation, has moderated in the last few months and global fuel prices are also down. Therefore, if RBI, which is a highly professional organization, in its wisdom decides to bring down the cost of capital, it will give a good fillip to the Indian economy,“ Jaitley said in his keynote address.

Any rate cut will also give fillip to the real estate sector, which has been badly affected owing to the slowdown in the economy. The RBI chief, who is not entirely convinced, will have to present a cogent case if the RBI were to hold back on rate cuts, as resentment is rising against higher rates in the face of an uncertain recovery, a benign outlook for inflation, and falling global commodity prices.

“All the parameters are indicating that there will be further fall in inflation. Inflation may go up a little bit between November and January of 2015, due to the base effect. But by March it will be well below whatever the glide path that is indicated by the RBI,“ Arundhati Roy, SBI's CMD, said.

“RBI governor has indicated that he will be data driven... maybe, by the end of the fiscal (cut in the interest rate by the RBI),“ she added. Asked if she expected rate cut from RBI next month, she said “no“.

High interest rates are affecting banks also, as this has slowed down the credit off-take. According to RBI data, growth in aggregate deposits accelerated to 12.3% in September 2014, from 11.5% a year ago, whereas gross bank credit decelerated to 9.5%, from 15.1% during the year.

This acceleration in aggregate deposits as well as deceleration in gross bank credit was broad based and seen across population groups, saddling banks with large surplus deposits which now plan to cut deposits rates.

Source: Times Property, Nov 29, 2014

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