The Reserve Bank of India (RBI), which is set to present its first quarterly review of monetary policy next week, is unlikely to go for further interest rate cuts, although its overall stance is likely to be more pro-growth than otherwise.
There are two main reasons that may prevent the Indian monetary authority from going in for further easing of the policy stance. First, a rate cut in present circumstances when the government is set for huge borrowings will have little impact. While there is enough liquidity in the system currently, in wake of large sovereign paper hitting the market, it will be liquidity management that would drive policy in near term rather than short term lending rate of RBI.
Secondly, although the wholesale inflation is in the negative terrain, the consumer prices indices continue to grow at close to 8-9%. Food prices are high and increasing at a swift pace. Overall, there are all indications that RBI needs to suggest that inflationary pressures are building in the economy notwithstanding the statistically generated negative WPI numbers.
Therefore the RBI would like to avoid any possibility of overheating the economy as even if the bank decides to cut rates now, the monetary policy transmission will take its time and by the time the monetary currents reach the destination, broader inflation too may already be on rising trajectory.
Better than expected growth in the March quarter at 5.8% (compared with market expectations of 5.3%), and sequential improvement high frequency indicators like the index of industrial production etc also suggest that economy is gaining momentum, dispensing the need for further cuts.
However, only factor that RBI would be wary of is poor credit off-take. Credit growth has fallen to about 16% from more than 23% last year. While the apex bank believes poor credit off-take is due to lesser demand from the corporate sector, it will still have to take a soft view on the issue. Most likely the RBI will use its persuasive powers to ensure greater lending by banks rather than using any policy or reserve instrument.