Time for the cut?

Published on May 23, 2015 00:40:40 AM
News

The second bi-monthly monetary policy statement of 2015-16 will be announced on June 2 and it is widely viewed that the next round of rate cut may be driven more by growth considerations as inflationary momentum is expected to remain subdued. The Monetary Policy Framework Agreement signed by the Government of India and the Reserve Bank in February will shape the stance of monetary policy in 2015-16 and the following years.

It is widely viewed that the next round of rate cut may be driven more by growth considerations as inflationary momentum is expected to remain subdued

The Reserve Bank will stay focussed on ensuring that the economy disinflates gradually and durably, with the Consumer Price Index (CPI) inflation targeted at 6 per cent by January 2016 and at 4 per cent by the end of 2017-18. The Reserve Bank’s intent is to allow the disinflationary momentum to spread through the economy, but remain vigilant about any resurgence of inflationary pressures that may destabilise the progress towards the inflation objectives set out in the Agreement.

Comfortable liquidity conditions should allow banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy. Finance Minister Arun Jaitley is also of the view that it's time for RBI to cut rate in view of moderation in inflation and subdued industrial growth.

The RBI has lowered its policy rate twice so far in 2015, but maintained status quo at the recent policy meet on April 7 in the wake of unseasonal rains impacting food prices. The repo, i.e. the rate at which the RBI lends to banks, is currently 7.5 per cent and the cash reserve ratio (CRR), the amount of deposits that lenders park with the central bank, 4 per cent.

Looking ahead, the RBI’s developmental and regulatory policies will continue to be guided by the approach to improve the efficacy of monetary and liquidity management, expand financial inclusion and carry forward banking sector reforms by adapting the best international practices to country-specific requirements.