Is RBI Likely to Announce a Rate Cut on Wednesday?

The RBI’s (Reserve Bank of India) 6.25% policy rate is currently at the same level as it was when India’s inflation rate was seven times higher than today’s rate. It is an understood fact that when there is a rise in the price of all commodities, the value of money should also increase and same should be true during the reverse situation.

With existing retail inflation (which is all-time low) of 1.54%, there should be a cut in the rates too. The last two months’ deceleration has put the inflation rate at 2.0-3.5% low.

It comes as no surprise that on Wednesday when MPC (monetary policy committee) will release the policy resolution, the bond markets are expecting a rate cut of the 25 basis points.

However, there are certain factors that could prevent RBI from cutting its policy rate such as:

• Transmission hiccups in the banking sector because of the huge stockpile of bad loans. A repo rate cut will not make a significant difference to the bond yields which have already been dropped by a huge margin.
• The surge in real interest rates due to inflation fall and current real interest rates can give RBI a reason to cut the rate by 75 basis points.

RBI might find it hard to explain the rate cut as it may look like contradictory from its previous statements. It may find it even more difficult to justify a pause as that would signify that RBI is looking through a drop of 100 bps in core inflation in a mere period of two months.

With such a dilemma, all are keeping an eye and waiting curiously for the announcement to be made by RBI on Wednesday.