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Economists see 25 bps rate cut by RBI

Subbarao has been stubborn on bringing down inflation before yielding on demand for sharp interest rate cuts to revive growth.

Apr 29, 2013, 05.00 AM IST

MUMBAI: Never in the past 12 months have the economists and traders been so unanimous and optimistic about what RBI Governor Duvvuri Subbarao would do on interest rates – a cut to revive the flagging economy.

The governor, who put taming inflation ahead of growth revival in the last 18 months after being accused of being behind the curve to curb price rise, will take comfort from Wholesale prices falling to three year low in March. A grim industrial scenario with output contracting to 0.6% from 4.3% in February last year should aid his argument for lowering interest rates.

Government’s decisiveness to raise administered prices of diesel and the fall in global commodity prices such as crude oil and copper due to fears of a slowing Chinese economy should provide the comfort that at least industrial commodity prices won’t pose a threat on inflation.

A 25 basis points reduction in the repo rate, the rate at which the central bank lends to the banks, to 7.25%, is near certainty when Subbarao announces the annual monetary policy on Friday, an ET poll of 15 economists shows. A basis point is 0.01 percentage point. If the governor who had frustrated every lobby group – from the corporates to politicians – for the whole of last year by not yielding to pressure chooses to lower the repo rate by 50 basis points, it is a bonus.

“There is headroom for a 50 basis points cut too as global commodity prices are still modest,’’ said Saugata Bhattacharya, chief economist, Axis Bank.

Subbarao has been stubborn on bringing down inflation before yielding on demand for sharp interest rate cuts to revive growth that was stalled for a variety of reasons, including government’s indecision on many issues. Also, the government has been profligate for much of the last fiscal year that held the governor from lowering the rates. But the situation has since changed with the biggest achievement being holding fiscal deficit below the targeted 5.3% of the gross domestic product.

WPI fell to 5.96% in March 2013 from 7.69% in March last year and IIP is at 0.6%, against 4.3% in February 2012. RBI last year reduced rates by 50 basis points, and the cash reserve ratio, the proportion of deposits that banks have to keep with RBI, by 75 points. It also bought back bonds worth Rs1.27lakh crores to keep the liquidity comfortable.

Some global factors are also converging to favour an easing cycle. Crude prices have fallen nearly 15% in the last one month. Copper, aluminum, and zinc are all weak as China’s economy is feared slowing.

Along with that the Indian Meteorological Department has forecast a normal monsoon, a boon that could ease pressure on food article prices which have been keeping the consumer prices high.

“The Rabi crop is likely to be good one,’’ said Raghuram Rajan, chief economic advisor to the government. “That will help bring inflation down. So as inflation comes down, there is case for RBI to cut rate. I think, we have a case for stronger growth.” Investors have nearly factored in rate cuts driving bond yields to three-year low at 7.74%. It may fall further as the governor could keep reducing rates throughout the year if inflation eases further, which most economist expect to happen.

But some fear that given the volatility in commodity prices, and the government’s potential temptation to turn profligate again in a year before general elections could temper the outlook for the rest of the year even though a cut is given next week.

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