RBI may Surprise Markets with Rate Cuts after Big-Ticket Reforms

New Delhi: After a series of big-ticket reforms announced by the government, the Reserve Bank of India (RBI) is likely to surprise the markets with some easing in policy rates, even though inflation remains stubbornly high. While some analysts say the central bank was not in a position to cut rates given the recent spike in inflation, majority of them feel the government might force the RBI to act for the sake of growth. "We are not expecting any big rate cuts. But there might be some surprise," Anis Chakravarty, senior director, Deloitte in India, told. Chakravarty said inflation is likely to rise further due to recent hike in diesel prices, which will have cascading effects on the economy. India's core inflation, based on wholesale prices, soared to 7.55 percent in August as compared to 6.87 percent in the previous month. The RBI considers a 4-5 percent inflation level comfortable. In a major step forward towards rationalising subsidies on petroleum products, the government last week announced the sharpest ever 5 a litre or nearly 12 percent increase in diesel price. The move is aimed at controlling galloping fiscal deficit and stave off ratings downgrade. Diesel prices have a huge cascading effect and it is likely to put further pressure on inflation in the coming months. "In the short-term, inflation is going to go up because of diesel price hike," Sanjeev Krishan, Executive Director at PricewaterhouseCoopers (PwC) told. Krishan said the RBI is likely to maintain a status quo and might start cutting rates in the next policy review. In the first quarter review of monetary policy announced July 31, the central bank had kept the repo rate, the rate at which it lends to commercial banks, unchanged at 8 percent. The reverse repo rate, the rate at which the apex bank borrows money from commercial banks, was also kept unchanged at 7 percent. However, the RBI had cut the statutory liquidity ratio (SLR) by a percentage point to 23 percent to ease the flow of credit to industry. "Liquidity is not a concern at the moment, so RBI is unlikely to cut SLR," said Deloitte official . The RBI has cut policy rates just once since the beginning of 2010. The central bank eased monetary policy and cut lending and reverse lending rates by 50 basis points in April, after hiking it 13 times in two years. Despite stubbornly high inflation, India Inc has been pressing on the central bank to cut rates, in order to stimulate business activities and revive economic growth. R.V. Kanoria, president, Federation of Indian Chambers of Commerce and Industry (FICCI), said the RBI must complement government's efforts in improving business sentiments and reviving growth. Sending a strong signal to push forward the reform process, Prime Minister Manmohan Sigh's government last week announced that it would allow up to 51 percent foreign direct investments in multi-brand retail, 49 percent FDI in aviation sector and also eased policy to attract overseas money in single brand retail. "RBI should appreciate the intent of the government in putting its fiscal house in order and perhaps complement its efforts in stimulating investment and consequently employment by making private borrowings from the banking system cheaper," said Kanoria. According to the latest Central Statistical Organisation (CSO) data Indian economy grew at a sluggish 5.5 percent in April-June 2012 period as compared to 8 percent in the corresponding quarter of previous year. In fact, industrial production has declined. Factory output, measured in terms of the Index of Industrial Production (IIP) declined by 0.1 percent in April-July 2012 period, according to official data released last week. "While monetary intervention in the form of repo rate cut has been due for a while, the economy is in need of sentiment boosters," said Chandrajit Banerjee, Director General, Confederation of Indian Industry (CII).