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Pressure mounts on RBI to cut policy rate, say experts

Monday, July 17, 2017

With inflation falling to record low levels and industrial growth slipping to below 2%, bankers and economists feel the pressure has increased on the Reserve Bank to cut benchmark interest rate next month.

The six-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel will meet on August 1-2 for the third bi-monthly monetary policy review of 2017-18. The MPC in its previous review in June had retained the repo rate at 6.25% for the fourth straight time citing risk to inflation.

Private sector Kotak Bank is of the opinion that since the RBI has revised down its inflation trajectory sharply in the June policy, and given that inflation reading, the central bank has some room to be accommodative. "We expect the MPC to cut repo rate by 25 bps in the August meeting," the bank said in report.

BofA Merrill Lynch Global Research too expects the MPC to cut rates by 25 basis points (0.25 percentage point). An SBI report said that most inflation risks are now on the downside and expect the retail inflation to be sub-2% for the next month, sub-3% for August-September and sub-4% for October-November and 4-4.5% between December and March.

For 2017-18, CPI inflation average could thus be below 3.5% 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% in June. The wholesale price inflation for the month too has dropped to eight month low.

Industry chamber CII is of the view that declining inflation, which has been undershooting the central bank's inflation target by a large margin, should induce the RBI to resume its rate easing cycle. CII said it "strongly recommends" a rate cut of 50 basis points in the forthcoming monetary policy to provide a fillip to demand.

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