There is no magic wand to remove inflation the RBI governor Raghuram Rajan had once said underlining how inflation was one of the biggest roadblocks in the growth of the Indian economy. The Reserve Bank of India kept the repo rates unchanged in the fourth bi-monthly monetary policy issued last month as the premier bank felt that 6% inflation target was risky for a repo rate cut and could deflate the regular improvement in the inflation.
Now with retail inflation easing further to a five-year low of 6.5 % in September, financial analysts feel that RBI would meet its inflation targets much before the January 2016 deadline. In such a scenario speculation is ripe for possibility of repo rate cut in the coming months.
Rates cuts unlikely this fiscal:
The Reserve Bank of India in its fourth bi-monthly monetary policy did not change the repo, reserve repo or SLR rates even after retail inflation eased to a five-year low of 6.5 per cent in September. Financial experts are of the opinion that seeking any rate cuts in the remaining period of this fiscal would be unwarranted. RBI Governor Raghuram Rajan while announcing the fourth bi-monthly monetary policy had underlined that any change in repo rates with inflation mongering at upside of the 6% inflation target is risky as it can deflate the regular improvement in the inflation.
Financial experts feel that RBI is not too eager to ease off repo rates at this stage where the retail inflation is bordering on the 6% percent mark albeit a little lower. Since inflation has been a sore point for the Indian economy for a long time, the RBI is likely to take a call of the repo rate cut only after it manages to achieve its long term target of bringing inflation under control.
Working towards an inflation policy change:
The finance ministry and the Reserve Bank of India are all set to finalize a new monetary policy by the end of the year, paving way for government intervention in monetary policy framework. As a result of the new financial policy, the central government would be the final authority in fixing retail inflation targets while the Reserve Bank of India would retain its suggestive powers. The government has already underlined its commitment to reduce retail inflation by six percent before the deadline of January 2016; the policy change is likely to be effective in the near future.
Changes expected in sixth bi-monthly monetary policy in Feb 2015:
With retail inflation dropping substantially in September a number of financial experts has advanced their projections on the likelihood of a possible policy rate cut by the Reserve Bank of India (RBI) much before the January 2016 deadline. With the weak monsoon not depleting the agricultural output as feared or estimated earlier and constant decline of retail inflation with likelihood of further reducing in the coming months, the Reserve Bank of India is likely to take a call on the repo rate cut in its sixth bi-monthly monetary policy scheduled for February 2015.
On the other hand a decline in vegetable prices may act as a sore point leading to constant dropping of inflation rates. With a number foreign institutional investors pumping money in booming Indian markets, any change in the US Federal Reserve rates can lead to a decline of foreign funds leading to slower disinflation in the coming months.
Impact of the RBI Policy on Common Man:
As a direct impact of the RBI policy announcement of unchanged repo rates, any loan installments are unlikely to come down anytime soon. The regular decrease in consumer prices impacting the household budget will bring cheer to the Indian citizen as inflation gets tamed slowly. The long pending demand for any decrease in interest rates for the manufacturing sector would also have to wait till a repo rate cut is announced which may happen only by February next year if all goes well.