January rate cut subdues expectations of RBI on Tuesday

Mumbai, Feb 2:

Following the Reserve Bank of India’s (RBI) unscheduled rate cut in January, expectations of another cut remain more subdued going towards the central bank’s policy review scheduled for Tuesday.

RBI Governor Raghuram Rajan in mid-January cut the repo rate at which it lends to commercial banks by 25 basis points to bring it down from eight percent to 7.75 percent. It was the first reduction in almost two years.

Rajan then said further easing of rates would depend on “data that confirm continuing disinflationary pressures.”

“Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure,” he added.

While retail inflation slipped to 5 percent in December, the Wholesale Price Index ( WPI) inflation remained at a near zero level (0.1 percent).

Regarding the government’s fiscal deficit-control target of 4.1 percent of the GDP by March, data showed Friday that the deficit has exceeded the budget estimate in the first nine months of the fiscal, though on the same day the government recovered ground somewhat by earning over Rs.22,000 crore from disinvestment in Coal India.

Latest data by the Controller General of Accounts shows that deficit during April-December period was over Rs.532,000 crore as against the annual budget estimate of Rs.531,000 crore.

The NDA government’s first full budget, that will critically guide growth and the allocation of liquidity in the next fiscal, will be presented to parliament on Feb 28.

Another factor for Governor Raghuram Rajan is that data on the day of his January rate cut showed the December trade deficit had fallen to a five-month low on account of plunging crude oil prices, which dropped to around $45 a barrel.

Rajan may be tempted to look to the government to stimulate growth in the face of sentiments being voiced by industry.

Painting a dismal picture of the economy during the last six months of 2014, India Inc. Sunday said not much had changed on the ground at the industry level during the period falling within the Narendra Modi-led government’s tenure.

The chamber’s respondents were, however, optimistic that things will improve a lot in the next as many months, the Associated Chambers of Commerce of India (Assocham) said in a statement here.

“As many as 54.2 percent of the respondents in the Confidence measuring survey said not much has really changed at the operating level in the last six months, but more number of industry leaders expressed optimism about the shape of things to improve going forward,” Assocham said.

In an analysis of the unscheduled rate cut last month by Rajan who, in 2005, had predicted the 2008 financial meltdown that is still affecting global economy, IANS had pointed out that slmost a decade later Rajan is stronger in his belief that global markets now are at the risk of a crash due to the competitive loose monetary policies being adopted by developed economies. IANS