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Nachiket Kelkar
Nachiket Kelkar

ECONOMY

Drop in inflation, low IIP data may prompt RBI to cut key rates

rbi-bankruptcy-file-pti The June inflation figure is significantly lower than RBI's medium-term inflation target of 4 per cent | PTI

A sharp drop in retail inflation and the industrial production data, also coming in lower than expected, could put further pressure on the Reserve Bank of India to reduce key interest rates, exports feel.  

Data released by the government on Wednesday showed India's consumer price index (CPI) inflation slowed to 1.54 per cent in June, its lowest since 2012. 

CPI inflation in May had stood at 2.18 per cent. 

The June inflation figure is significantly lower than RBI's medium-term inflation target of 4 per cent. 

Furthermore, industrial production in May also slipped to 1.7 per cent, versus 3.1 per cent in April. 

The lower growth in IIP hints at slower growth in the economy, which coupled with May inflation —lower than RBI's inflation expectation—would create room for the central bank to cut rates. 

"The current macroeconomic data suggests room for the RBI to cut the interest rate," said Vaibhav Agrawal, head of research at Angel Broking. 

He, however, feels RBI may wait for some time to gauge the impact of the US Federal Reserve unwinding its balance sheet. 

There are other analysts who also see RBI cutting interest rates further this year. 

Over the next couple of months, central bank will be watchful of the inflationary impact if any of the increase in house rent allowances by the seventh pay commission and the rollout of the Goods and Service Tax, said Manisha Sachdeva, associate economist at Care Ratings. 

She sees RBI cutting repo rate in October. 

Shubhada Rao, chief economist at Yes Bank, says an interest rate cut could be seen in next policy. 

"Given the current inflation trajectory, we reiterate our call of a 25 basis points rate cut in August policy," she said. 

Meanwhile, the Federation of Indian Chamber of Commerce and Industry, too, has raised concerns over slowdown in manufacturing activity across sectors. 

"This further underlines the need for major reforms to improve the investment climate further— reducing interest rates would help in stimulating demand and also reviving investments," said A. Didar Singh, secretary general, FICCI. 

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Topics : #Inflation

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