RBI Must Mull For Cut Rates??

RBI

A number of  macroeconomic are taking place to favour RBI to mull for rate cut when it meets on June 2, to stimulate sluggish economic growth. On the positive side, inflation and fiscal deficit have come down while on the negative side, dismal industrial output growth, poor corporate profit and exports slowdown have raised concern about credit crunch and growth prospects.

According to official figures, wholesale inflation dropped to a new low of (-) 2.65 percent in April. This is the sixth month in a row when deflation pressure continued, and, according to a SBI research report, WPI inflation is likely to fall further to about (-) 3 percent in May despite concerns over weak monsoon and recent fuel price hike. Retail inflation has come to fall to a four-month low of 4.87 percent, and it is also expected to continue declining in the coming months.

Meanwhile, the Centre has contained fiscal deficit at 4 percent of GDP for 2014-15 against the 4.1 percent target, which was set by the UPA government in its interim budget and later adopted by the Modi government. In addition, the revenue deficit for the year has also come down to 2.8 percent, beating the budget target of 2.9 percent. I hope the central bank will take these developments into account in its forthcoming policy review.

Despite positive developments, the industrial production scenario is worrying. In March, factory output growth slowed to 2.1 percent from 4.8 percent in February. Similarly, the fall in corporate earnings is another factor that has strengthened the case for a rate cut. In addition, the worry about expensive credit and high interest rates, over which even the Finance Minster has raised concern time and again, should not be overlooked by the Central bank.

But while expectations are wide, apprehensions still persist. The weak rupee and the recent hefty hike in diesel and petrol prices may hold the RBI from cutting rates. It may also choose to wait to get a better monsoon picture. I find it difficult to believe that these concerns, though not baseless, should be overriding factors in the RBI decision. The economy is in a fragile state, demand has slumped and inflation looks pretty good, and if the central bank still chooses to pause and argue not to favour 'rate cut', this has to be seen in days to come.

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