Rate cut – Will they or won’t they? Street divided

PerformanceGurus Staff

New Delhi

Policy makers in India will keenly watch the outcome of the monetary policy review meeting of the Reserve Bank of India (RBI) on Tuesday, hoping the central bank will not be deterred by rise in retail inflation and cut down interest rate by at least 25 basic points.

The street is divided on the possible outcome. While the Government has been indirectly, through source-based leaked stories in media, mounting pressure on RBI Governor Raghuram Rajan to give up a hawkish policy stance and take measure to provide more liquidity, there are others who feel that time is yet not ripe for such measure.

In a comment on July 14, rating agency Moody had said that the RBI was likely to cut interest rates despite retail inflation surging to an eight-month high in June. “We still think the Reserve Bank of India will deliver another interest rate cut in 2015,” Moody’s Analytics Associate Economist Faraz Syed said in a research note.

The RBI has cushion of falling commodity prices and better than expected monsoon so far. But a lot of people feel that Rajan is not an adventurist and he may not tamper with rate as of now till he has a clear picture about the inflation trajectory in the coming months.

Sajjid Chinoy, Chief Economist at JP Morgan India, has been quoted saying,:”Core inflation will be a source of concern to the RBI, because what it suggests, even though any cyclical recovery is modest, along with that recovery we are seeing pricing power picking up.”

Neeraj Gambhir, Co-Head Fixed Income at Nomura, has been quoted by the media saying: “Broadly, while the inflation risks seem to have receded a little bit, there is still the major event of Fed which needs to be watched for.”