Retail inflation rose in October owing to a spike in prices of pulses, but is still moving along RBI’s expected trajectory.
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While the wholesale price index (WPI) is on a negative zone, the consumer price index (CPI), also tracked by RBI for cutting rates, has started moving up. It is for this reason we expect the RBI to cut 25 bps in February after CPI inflation meets its “under-6 per cent” January 2016 target.
But the room for maneuver now looks narrower than three months ago, when prices were rising by less than 4% year-over- year.
Earlier, Vice President Jusuf Kalla strongly criticized BI’s hawkish monetary policy, which he said was against the government’s pro-growth economic policy.
“Fast changing geopolitical situation in the Middle East and the increased terror threat with consequent economic costs will surely weigh on the RBI’s policy stance which is not expected to give any more cut in the interest rates in the ensuing review”, it pointed out.
One basis point is one-hundredth of a percentage point. A small part of this cut have been passed on by banks to the end-customers.
Analysts are of the view that the Reserve Bank of India is likely to wait for the Budget announcement before proceeding further. “At the same time, the fiscal deficit is already low relative to the past”, he said. The RBI has always insisted the government to take care of its finances as a precondition for significant monetary easing.
Another state-run lender United Bank’s executive director Sanjay Arya said he also expects a status quo on Tuesday. There is a sort of “pent-up price deflation” in the eurozone to follow the trend in wage deflation, which we could read as a parallel to Federal Reserve Chair Janet Yellen’s “pent-up wage deflation” thesis for why USA wage growth has remained stagnant in recent years. A hike in US interest rates accompanied by a cut in the RBI repo rate may cause a sharp decline of the Indian rupee, which recently hit a 2-year low of 66.90. Meanwhile, industrial production (IIP) growth moderated below expectations to 3.6 per cent y-o-y in September from 6.3 per cent in August. More worryingly, growth in capital goods, which is an indicator of investment activity in the economy, grew at a visibly slower pace of 10.5 percent in September compared with 21.8 percent growth in August and 12.3 percent in the corresponding period in the previous year.
All 45 respondents surveyed by Reuters last week expected the Reserve Bank of India to hold the repo rate at 6.75 percent, after easing it by 50 basis points at its last policy review in late September.
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Also, the central bank will continue to be vigilant for signs that monetary policy adjustments are needed to keep the economy on the targeted disinflationary path, it said.
