RBI Monetary Policy Review: Why MPC should vote for rate cut?

New Delhi: With retail inflation receding to record low levels, the six-member monetary policy committee (MPC), headed by RBI Governor Urjit Patel is likely to cut the benchmark lending rate by at least 0.25 percent in its third bi-monthly monetary policy review on Wednesday afternoon (August 2).

A significant moderation in retail inflation over the past three months has reinforced calls for further monetary policy easing from the central bank, which changed its stance to neutral from accommodative at the start of the year.

At its second bi-monthly monetary policy review of the fiscal on June 7, the RBI maintained status quo on its repo or short-term rate for lending to commercial banks, at 6.25 percent. In doing so, the policy statement said the six-member Monetary Policy Committee was guided by the risks to inflation.

The central bank last cut its key interest rate in October 2016.

Structural factors and production trends signal that food inflation should settle around 2-3 percent over the next few months, said DBS, a leading Asian bank with focus on further expanding in India.

Downside risks from other factors are also notable - low oil prices, strong rupee, normal monsoon and disinflationary impact from Goods and Services Tax (GST) changes, according to the bank.

Beyond the mechanical uplift from housing rent allowance changes, concerns over second round effects are not likely to materialise, it noted.

 

A SBI report also said that most inflation risks are now on the downside and expect the retail inflation to be sub-2 percent for the next month, sub-3 percent for August-September and sub-4 percent for October-November and 4-4.5 percent between December and March.

For 2017-18, CPI inflation average could thus be below 3.5 percent with a downward bias, the report added.

The retail inflation, which the RBI mainly factors in while deciding interest rate, has declined to historical low of 1.54 percent in June. The wholesale price inflation for the month too has dropped to eight month low.

Commenting on the retail inflation data, Chief Economic Advisor Arvind Subramanian had said the "paradigm shift" in inflationary process has been missed by all, who have made "systematic inflation forecast error", apparently referring to the RBI.

In the MPC, RBI Governor Urjit Patel had argued for avoiding "premature policy action" and waiting for more inflation data.

"Incoming data is expected to provide greater clarity on the durability of recent food and non-food disinflation," he had opined.

One of the MPC members, Ravindra Dholakia, however, had advocated a 50 basis point cut in the repo rate, saying several noteworthy developments recently on prices and output fronts warrant a decisive policy action.

As always, India Inc has been pitching for the rate cut to stimulate growth.

Citing inflation at a five-year low and deceleration in factory output, Assocham has written to RBI Governor Urjit Patel for at least 25 basis points cut in the policy interest rate.

"The wholesale price index (WPI) also eased to 0.9 percent from 2.17 percent. The case for rate-cut is additionally strengthened by easing of food inflation to (minus)2.12 percent from 0.31 percent. Good monsoon forecasts for the current financial year have additionally created a stance for further reduction in the food inflation," Assocham said.

"The deceleration in factory output growth could further bolster the case for a rate cut next month to boost Asia's third-largest economy, which grew 6.1 percent in the January-March quarter -- its weakest pace in more than two years," it said.

Factory output slumped to 1.7 per cent in May, from 8 per cent a year ago due to poor performance of mining and manufacturing.

With Agency Inputs