Rate Cuts Now a Realistic Possibility, Due to Decline in Inflation and Commodity Prices

The subsiding inflation levels and the significant reduction in commodity prices, has raised the chances of a rate cut by the RBI significantly, improving the market sentiment

The inflation levels have finally come down below 6%, which is its lowest in the past three years. The government has targeted the figure persistently, as it is the threshold for its comfort zone. Also the commodity prices, including precious metals such as Gold, have come down dramatically, due to the lowered demand from other major economies, such as China. All these factors are making the experts suggest, that the RBI now has much more headroom, for rate cuts, which may now be a reality in the near future.

The month of May could witness a reduction in the key rates by the RBI, which would lead to a decline in the bank lending rates, passing the benefit straight on to the consumer. The moderated inflation, especially the food inflation, will provide the RBI with the impetus to go ahead with a rate cut of around 0.25 basis points, in the policy review on May 3. The bearish gold segment, along with the reduction in crude oil and industrial metal prices, would also contribute to the easing of the situation, as this would help keep the Wholesale Price Index in check and limit the imports of the relevant materials in the coming year.

Although the rate cuts are extremely likely, there is a possibility that the apex organization may delay the move, citing the sizeable cuts in the past as a reason. The banks could be asked to transmit the benefits of the cuts first, which would allow the trend to consolidate and thus have a better impact.


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