Is Another Rate Cut In The Offing?

Home »  Finance »  Is Another Rate Cut In The Offing?
Is Another Rate Cut In The Offing?
Deepika Asthana - 16 November 2019
India’s CPI inflation came in at its 16-month high value of 4.62 per cent in October 2019 due to a sharp increase in food prices, breaching the RBI’s medium-term inflation target of 4 per cent; the inflation was 3.99 per cent in September 2019. The reading was above the market consensus of 4.35 per cent. Meanwhile, core CPI fell to 3.3 per cent from 4.5 per cent, driven by household goods and services, personal care, health, and housing. Food inflation came in at 6.9 per cent Y-o-Y vs. 4.7 per cent previously. The large weight of food articles in the index translates to about 100bps increase in headline CPI. However, fuel prices and core inflation eased off due to which the increase in headline inflation was contained at 60bps.
The prolonged monsoon in states like Maharashtra, Karnataka, Gujarat, parts of Madhya Pradesh and West Bengal saw food inflation move up significantly. These states are major producers of vegetables in the country. The spike in vegetable prices will likely be a temporary, adverse supply shock because of unseasonal rains, which is likely to reverse in the coming months.
The core momentum has been weak in 2019. This is an indication of soft activity and a growing slack in the economy. Q1 and Q2 FY20 growth numbers were weak, while there have been signs of some stabilization/recovery in October 2019 (car sales, railway traffic, non-food credit). However, the fact that core momentum has slowed in this reading suggests that there is not enough activity in the economy to boost pricing power.

What does all this mean for the RBI’s December policy review?

There is weakening momentum in growth. Moody and Fitch have reduced India's GDP growth rate. Even though the RBI has so far reduced rates by 135bps, there has been a limited transmission of the policy rate cut. This is despite the weak credit growth and excess liquidity in the banking system. The market is expecting a 25bps rate cut in the December 2019 policy notwithstanding the higher inflation figures of October 2019. The RBI is expected to maintain its accommodative stance. The RBI has put in place the mechanism to link the loans to repo rate. The transmission of these rates would help kickstart the economic engine.
What Makes Millennials Borrow
Things To Consider While Availing A Short-term Loan

Related Articles