Rate Cut Hopes Muted But Raghuram Rajan Fireworks Not Ruled Out

File photo: RBI Governor Raghuram Rajan

But an improvement in the monsoon and a fall in fuel prices have led to some optimism in some quarters that RBI chief Raghuram Rajan may spring a surprise.

Research firm Moody’s Analytics on Monday said the Reserve Bank is likely to cut the benchmark rate by 0.25 per cent as inflation is likely to remain subdued on the back of average rainfall and lower commodity prices.

“The Reserve Bank of India could deliver fireworks in its monetary policy meeting on Tuesday by cutting the repo rate by 25 basis points to 7 per cent,” Moody’s said in a report.

G Chokkalingam, founder of Equinomics, a Mumbai-based research and fund advisory firm, said, “Fundamentals warrant a rate cut. India is the only one which is not cutting rates sufficiently despite a deflationary scenario in the world.”

Dr Rajan has already cut the rate three times this year to loosen credit and boost slowing growth. After easing policy rate by in June, Dr Rajan said further moves would depend on inflation outlook.

On the other hand, Arundhati Bhattacharya, chairperson of India’s biggest lender State Bank of India, expects Dr Rajan to hold rates steady.

“I am not expecting any rate cut,” she said. “The CPI (consumer price inflation) has gone up a little. Though, it is mainly on account of food prices. The RBI has been benchmarking it to the CPI numbers, I think it is unlikely,” she added.

Despite better-than-expected rainfall in June-July, the India Meteorological Department has retained its forecast for this year’s monsoon rains at 88 per cent of the long-period average, adding the El Nino weather pattern could strengthen during the rest of the season.

“The RBI is likely to maintain its stance that the evolving inflation outlook needs to be monitored closely,” said Radhika Rao, economist at DBS in Singapore.

However, with commodity prices like oil remaining low, consensus seems to be building of a RBI rate cut by the year-end.

In the Reuters poll, majority of analysts predicted the repo rate would be cut to 7 by the end of December.

(With inputs from Reuters)