RBI Seen Cutting Rates To Over 6-1/2 Year Low, Faces Pressure To Do More

August 2, 2017

The Reserve Bank of India will likely cut its main policy rate on Wednesday by a quarter percentage point to a more than 6-1/2 year low after inflation slumped. The question is whether the cautious central bank will signal readiness to ease more.
Forty of 56 economists polled by Reuters predicted the RBI will cut its repo rate by 25 basis points to 6.00 percent – the lowest since November 2010 – as a slump in food prices sent June consumer inflation to a more than five-year low of 1.54 percent.
That’s well below the RBI’s 4 percent target and its projection of 2.0-3.5 per cent in April-September, sparking pressure from the government and others to cut rates by 50 bps on Wednesday or signal another 25 bps easing later this year.
The central bank has previously warned that inflation could accelerate due to a seasonal rebound in food prices and factors such as planned pay hikes for government employees.
Retaining a cautious stance could cause tension with a government keen to lift the economic growth from January-March’s 6.1 percent – fast by global standards but the lowest in over two years.
Proponents of more rate cuts argue these would make loans cheaper and help companies refinance their debt, while potentially helping reduce some of the $30.3 billion in capital inflows into stocks and debt markets lifting the rupee by 5.6 percent against the dollar this year.
These arguments were seemingly given a boost after a private survey on Tuesday showed Indian factory activity suffered its deepest contraction in more than nine years after confusion about the new goods and services tax battered output and demand.

Source: Reuters

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