Will the 2019 rate-cut make the cut?

Blog | OUTLOOK

Many are hopeful that the sixth bi-monthly monetary policy for 2018-19 (scheduled on 7th February) will act as a balm to the market’s shock reaction when RBI Governor Urjit Patel resigned with no prior warning signs. The new governor, Shashikant Das’  first address is eagerly awaited by the industry, as monetary tightening is felt in many sectors like real sectors; especially Micro, Small, & Medium Enterprises (MSMEs). To ease these issues monetary crunch needs to be in focus. Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI) are of the opinion that a reduction in repo rate and Cash Reserve Ratio (CRR) would help to revive the investment cycle and also boost consumption. This, in turn, will support growth. These measures are necessary to facilitate the flow of credit to industry, especially to MSME & Infrastructure.

India’s headline inflation rate—based on the Consumer Price Index (CPI)—reduced to an 18-month low. Wholesale Price Index (WPI) softened to an eight-month low while retail inflation remained below RBI’s target of 4%. Looks like inflation is in positive and this makes the probability of the rate cut, higher.

Decline in rural demand, depressed prices of agricultural commodities, and sluggish growth in rural wages resulted in low private consumption. Factors like these are a plea for a need of monetary ease. The growth of imports accelerated at a much faster pace than that of exports, resulting in net exports pulling down aggregate demand. Also, the size of Gross Domestic Product (GDP) increased in quantitative terms and this means there could be a need for more currency in the economy.

Impact of the rate cut seems welcomed with cheers by the Indian stock markets, as ease of business will boost the economy and earning figures as a whole. So, need of the hour is to have an accommodative monetary policy focusing on growth considering price stability. How much of these wishes/advise will translate to reality?  Only time will tell. The 7th of February is not too far...