RBI seen to cut interest rate today, but may flag risks

New Delhi: Reserve Bank Governor Raghuram Rajan is widely expected to cut interest rate on Tuesday by a quarter per cent to a 4-year low to accelerate a sluggish economic recovery, but may underscore concerns over prices in a year when monsoon rains have been deficient.

RBI will present its fourth bi-monthly monetary policy for the current fiscal amid a clamour by the government as well as the industry for a cut in interest rate in view of subdued inflation, which Rajan had cited previously for no action.

The chorus for a rate cut has grown following headline inflation dipping due to lower commodity prices and industrial output yet to pick up pace. Rajan will have to balance these with concerns of a possible spike in food prices due to weak monsoon rains or a likely rise in global oil prices.

The impact of an anticipated US interest rate increase by the end of the year -- the first in nine years -- on emerging markets like India will also weigh on his mind in deciding on the monetary action.

The RBI Governor has been under pressure from the Finance Ministry as well as corporate executives to cut interest rate to spur recovery and mitigate the impact of slowing China on India.

Most bankers feel that benign inflation and status quo by the US Fed have given room for RBI to cut short-term lending (repo) rate by at least 0.25 per cent to 7 per cent.

Even Finance Minister Arun Jaitley last week asserted that common sense says interest rates should come down.

Jaitley had said inflation is "very much under control" and the country is better prepared than most emerging economies to weather the global economic turbulence.

Global turmoil triggered by devaluation of the yuan and reports of a slowing growth in China have impacted Indian currency and stock markets.

As regards the price situation, the wholesale price index (WPI) remained in the negative territory for 10 months in a row and stood at (-)4.95 per cent while retail inflation eased to a record low of 3.66 per cent in August.

The first quarter GDP print of 7 per cent was below market expectations while industrial output growth in April-July came in at 3.5 per cent.

India Ratings and Research (Ind-Ra) said it expects RBI to take a gradual route of repo rate moderation (by 0.25 per cent to 7 per cent) and sound cautious in its tone.

Major lenders like the State Bank of India also expect RBI to lower the repo rate. According to SBI Chairman Arundhati Bhattacharya, there is a space for rate cut as the possibility of food prices going up in coming months is negligible. "I do still believe that there is a space for rate cut in India. How much is difficult to state at this point of time," she had said.

There is a possibility of 0.25 per cent rate cut by the RBI, Union Bank of India Chairman & MD Arun Tiwari said. "I see a 25-basis point rate cut on September 29. But there will be no change in SLR and CRR as liquidity in the system is enough," Tiwari said.

Echoing similar views HSBC India country head Naina Lal Kidwai said there is a strong chance of RBI cutting interest rate by 0.25 per cent on September 29 as inflation has come under control.