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Will the Modi govt's new monetary policy panel cut interest rates?

Catch Team | Updated on: 4 October 2016, 10:23 IST

Will the recently formed Monetary Policy Committee ( MPC) reduce the interest rates in the country on 4 October? Finance Minister, Arun Jaitley had recently tried to build pressure on the MPC by saying that the the newly formed body will keep in mind the low inflation in the country while taking a call on the interest rates.

Both the market as well as experts have given mixed signals.

Credit Ratings agency, Crisil, in its report has said that "RBI may choose to wait for some more time before wielding the knife as inflationary trends may accelerate going forward".

Chief Economist with Crisil, DK Joshi, is of the view that the MPC would like to reduce the interest rates in the country but may like to be cautious on account of inflation and therefore may hold its guns before taking any decision to loosen the hold on the interest rate regime.

Another credit rating agency, the India Ratings and Research said "the sharp fall in retail inflation in August has accentuated the rate cut proposition in the next quarter, and termed as 'achievable' RBI's target of bringing retail inflation down to 5% by March 2017".

"But it may be too early to rejoice, given the baffling behavior of retail inflation in the past. The cyclical components either aggravate or soften it as is evident from the movement in wholesale prices," the agency's report added.

Out of the three bi-monthly monetary policy reviews in this financial year so far, the RBI has cut the repo rate only once in April from 6.75% 6.50%

The mood

The stock markets have behaved positively for the interest rate sensitive sectors like banking and automobiles.

Banking sector shares were up by around 1% to 3%.

In the automobile sector, shares of companies like Maruti, M&M and HeroMotocorp increased by 3.7%, 2.64% and 3.18% respectively.

If we look at the current condition of the industry at the level of inflation, it calls for a moderate rate cut.

The manufacturing sector growth moderated in September as pace of new orders and production came down as per the Nikkei Markit India Manufacturing Purchasing Managers' Index (PMI) -which fell to 52.1 in September from 52.6 in August. The PMI index is a gauge of manufacturing performance that indicates the growth in the sector.

The rate of inflation as per the Consumer Price Index was a little above 5%, which can prompt the MPC to moderate the repo- rate (the rate at which RBI lends money to commercial banks).

The six member, monetary policy committee, which has been formed through an amendment in the Reserve Bank of India Act will take the decision on interest rates in the country through a majority vote.

Of the six members in the MPC, three would are from outside RBI - Chetan Ghate, professor at Indian Statistical Institute; Pami Dua, director at Delhi School of Economics; and Ravindra Dholakia, professor at Indian Institute of Management, Ahmedabad.

The other three members include RBI governor Urjit Patel, deputy governor R Gandhi, and executive director Michael Patra.

First published: 4 October 2016, 10:23 IST