Softening inflation may pave the way for RBI rate cut

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The six-member monetary policy committee (MPC), led by the RBI governor Urjit Patel is expected to cut interest rates further this fiscal after retail and wholesale inflation slowed in the month of October. The experts are also forecasting a declining trend in view of the Centre’s demonetisation move which could put an additional downward stress on the prices.

Reserve Bank of India (RBI) is likely to cut borrowing costs by 25 bps in the near term owing to softening food prices which has facilitated the fall in the retail as well as wholesale inflation in October. With this development, it is expected that sme loan and borrowing cost for companies may come down considerably. It is also expected to enhance the growth capital of the retail loan portfolios of the banks, thus making it a win-win situation for both lenders and borrowers.

The Wholesale Price Index fell for the second consecutive month to 3.4 per cent from 3.57 per cent in September. Similarly, the Consumer Price Index based retail inflation plunged to a 14-month low of 4.2 per cent. It was at 4.39 per cent in September. Retail food inflation was 3.32 per cent compared to the 3.88 per cent recorded in the month of September. Likewise, the WPI food inflation was at 4.34 per cent in the month of October, compared to the 5.75 per cent reported in September.

With both indices easing, coupled with the government’s recent move to demonetize, India Inc has begun demanding an immediate 0.5 per cent cut in the repo rate with an added push aimed towards the housing and automobile sectors. Moreover, with the global oil prices softening, Consumer Price Index inflation is likely to fall short of RBI’s 5 per cent target of early-2018 by a substantial margin.

However, the timing of the rate cut will be determined by the volatility surrounding the outcome of the US Fed’s policy meet in December and India’s demonetisation chaos. If the volatility rises then the rate cut date could be pushed back to February 2016.