Govt expects rate cut from RBI in next monetary policy review

Key highlights:

• Government expects a helping hand from the RBI in the form of interest rate cut in the next monetary policy review
• Bankers are of the view that the RBI would maintain status quo as inflation has seen witnessed an increase
• Reserve Bank is scheduled to come out with next bi-monthly monetary policy decision on October 4

The government expects a helping hand from the RBI in the form of interest rate cut in the next monetary policy review on Wednesday to boost growth which fell to a three-year low of 5.7% in the June quarter.

Several experts and industry bodies too have made a strong case for lowering of the key interest rate in view of subdued inflation and the urgency to propel economic growth which appears to be reeling under the impact of demonetisation and GST implementation.

However, bankers are of the view that the Reserve Bank of India (RBI) would maintain status quo as inflation has seen witnessed an increase.

According to a SBI report, the RBI is likely to maintain status quo on key lending rate in its October 4 policy decision as it is "stuck in a conundrum" of low growth, mild inflation and global uncertainties.

It said that against the background of flexible inflation targeting, the obvious question that arises is choosing between the move towards the 4% inflation target swiftly or staying in the inflation band.

"We expect the RBI to stay on hold at the upcoming meeting as rising incoming inflation and projections of further acceleration in inflation ahead will mean that there would be limited space for further easing," Morgan Stanley said in the research note.

Last week, a top finance ministry official said there is scope for an RBI rate cut at the next policy review as retail inflation continues to be low.

In its last policy review in August, the RBI reduced the repo rate by 0.25% to 6% in August, citing reduction in inflation risks. The rate cut was the first in 10 months and brought policy rates to a near 7-year low.

However, retail inflation rose to a five-month high of 3.36% in August due to costlier vegetables and fruits. The consumer price index (CPI) based inflation was 2.36% in July.

The Monetary Policy Committee of the Reserve Bank is scheduled to come out with next bi-monthly monetary policy decision on October 4.

India Inc has already made a pitch for rate cut by RBI to perk up economic activity.

Assocham has written to the Reserve Bank of India and the Monetary Policy Committee to cut the interest rates at least by 25 basis points, given the challenges being faced by the economy which needs immediate measures for revival of growth.

"At least 50 basis points elbow room can be taken with regard to 3.2% fiscal deficit for the current year and the next financial year," the chamber said.

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