News Business Will RBI Governor D Subbarao initiate a rate cut on Monday?

Will RBI Governor D Subbarao initiate a rate cut on Monday?

Mumbai, Sep 16: Though government surprised people by biting not just one reform bullet but many in just 48 hours over the weekend, the question now is: Will the RBI Governor walk the much-needed monetary

will rbi governor d subbarao initiate a rate cut on monday will rbi governor d subbarao initiate a rate cut on monday
Mumbai, Sep 16: Though government surprised people by biting not just one reform bullet but many in just 48 hours over the weekend, the question now is: Will the RBI Governor walk the much-needed monetary extra-mile on Monday or will be weighed down by the 0.68 per cent spike in August inflation?



The Reserve Bank will announce the mid-quarter monetary policy review Monday morning, where everybody would expect Governor Duvvuri Subbarao to join the party and slash the lending rate, but for the inflation phantom that has raised its venomous fangs yet again.

Ironically, the flurry of events last week with diesel price hike and the third round of monetary easing have only compounded problems for Subbarao, who has been both blamed and credited in equal measure for his inflation phobia over the past 30 months or so.

Already the US and ECB actions had their immediate impacts on inflation as the commodity prices rose instantly across the globe. Gold hit a new high, metals are on a song and the most crucial crude rose nearly 1.5 per cent post the Fed announcement to buy $40 billion of US government bonds every month till the end of 2015.

Domestically, the impact of the rising crude will negate the positive impact on fiscal deficit which the 12 percent diesel price hike would have brought.

According to analysts, the diesel price hike will lead to an overall 1 per cent increase in inflation. Considering these two, the governor, they say will probably wait for some more time to cut rates.

To top it all, analysts have already discounted the government decision to effect a steep 12 percent hike in diesel price last Thursday, and a Rs 5.70 reduction in excise duty on petrol would be negated by the rise in crude prices.

This means that there will be little impact on the oil subsidy, though the government claimed that the same would
come down by 20,300 crore this fiscal.

Nonetheless, Subbarao, known for his unpredictability -- he disregarded the majority call to hold the rates in April by slashing the repo rate by an unexpected 50 bps and did the same when in March he cut CRR by an equal measure -- may have something surprising for everyone, say some analysts.

However, they also point that the Governor may hold the rates steady as they point out that the March-April easings were based on his expectation that the government will act on the policy and fiscal fronts. But nothing to that has happened till last Thursday. Also, they say there is no guarantee that the government will not backtrack yet again this time.

Bankers are also divided on their view. While SBI chairman Pratip Chaudhuri does not see the repo rate coming down but expects a 100 bps cut in the CRR (which he wants to be scrapped all together though), Union Bank head D Sarkar and OBC chief SL Bansal see the Governor doing the undoable by a 0.25 per cent repo reduction.

After an unprecedented easing that began with the 2008 credit crisis, the RBI embarked on a rate hike spree beginning October 2010 which lasted till December 2011, during which Subbarao jacked up the repo rate by a whopping 4.25 per cent to 8.50 per cent through 13 consecutive rate hikes.

But expecting the government to do its bit, as growth began to nosedive, he reduced CRR by 0.5 per cent in this January and again by another 0.75 per cent in March to pump liquidity into the system. Again, in April annual policy he did the unexpected by a 0.5 per cent cut in the repo rate.

But to his disappointment, the government looked the other way and did nothing on the fiscal and supply-side front.

But since last Thursday, all that is past as the government has really moved onto top gear with an avalanche of measures to boost both investment and sentiment.

So, Subbarao may surprise on the upside tomorrow, feel analysts. Or will he buy time to see that the government is serious with its new found vigour and earnestness? Question analysts.

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