RBI May not Cut Repo Rates

On 4th of August RBI has its Monetary Policy Review meet where it is expected that RBI will take call on cutting repo rates. But it has become very tricky for RBI to take any decision as some macroeconomic indicators seems to be not favourable mainly issue of inflation and this is against the current strategy of RBI. So RBI may decide not to ignore inflationary pressure. As there is considerably higher food inflation for the month of July than June 2015. But if we look at historical data it is evident that higher food inflation in the month June is not uncommon for India and it has become a new normality since long (at least since 2010). Because of seasonal changes India usually witness rise in vegetable prices in the month of July as compared to month of June. So it might be a cause of concern for RBI and RBI may decide to not decrease interest rates.

There is another angel too. According to the recent Nikkei India Manufacturing Purchasing Managers’ Index (PMI) for July, index has increased to 52.1 indicating growth in manufacturing sector. Also at the same time the price component of the manufacturing PMI has not increased in the month of July as compared to June. Rather it has fallen. So RBI may wait for cutting repo rate as manufacturing activities are picking up and also the profit without any rate cut. In this situation RBI may decide to wait and watch than taking any action.

So these two factors together may be reasons for no repo rate cut by RBI in its monetary policy review meet. But I feel that RBI should take a call on cutting repo rates to increase investment by private sector to boost economic activities further.

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