Wednesday, 08 April 2015 03:57

Will RBI cut interest rate?

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Market players are very much concerned about December 2 RBI meet as improved economic fundamentals have raised hope of interest rate cut after a yearlong unchanged rate.

Earlier analysts and economists were expecting no change in interest rate till the first quarter of 2015 but continuous fall in inflation changed view of some of them. Since last December the Consumer Price Inflation fell from 11.24% to 5.52% in Nov14 on yoy basis. Wholesale Price Inflation also fell from 7.52% to 1.77% during same span.

Recently we witnessed major fall in inflation due to significant drop in oil prices and lower agricultural commodity prices even after weak monsoon. WPI for Food and Fuel have come down to 2.70% and 0.43% which were in double digits last year.

Fiscal deficit has narrowed to 4.5% of GDP on yoy basis in this year which was 7.8% in 2008. But trade deficit has widened in this year thats a negative sign for the economy.

To propel growth engines- the Central Bank is also under government pressure to decrease benchmark interest rate. This time Politicians and Ministers are expecting interest rate cut as seen from their views and comments.

But is it right time to cut interest rate? If we look at RBI statements then it has provided clues of no sooner interest rate cut. The Central Bank may wait for the next year inflation and other data to see unbiased view of goods prices. Presently due to base effect we are getting pleasant inflation data. At present inflation is already below the target rate of 6% but it doesnt mean a surprising move from RBI.

India has become the destination to invest and foreign investors have been pumping money into debt and equity market since the beginning of the year. Any step by the Central Bank may not bring sudden change in this trend.

We may see gradual interest rate cut by RBI in first quarter of 2015 but not sooner. We may see panic in the market in coming week and traders should remain cautious about this.


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